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BFM MODULE – B
Chapter-17: LIQUIDITY RISK MANAGEMENT (MCQs)
(PART-II)

What we will study?

MCQs based on Macmillan Book?
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Q1. For assessing the liquidity mismatch in foreign currencies, as
far as domestic operations are concerned, banks are required to
prepare________statements?
a) Maturity and Difference Position (MADP) Statement.
b) Maturity and Mismatch Position (MAMP) Statement.
c) Maturity and Position (MAP) Statement.
d) None of the above.

Answer: C
Refer page no.492, Topic 17.13.
Explanation:
LIQUIDITY ACROSS CURRENCIES:
Banks should have a measurement, monitoring and control system
for liquidity positions in the major currencies in which they are
active.
For assessing the liquidity mismatch in foreign currencies, as far as
domestic operations are concerned, banks are required to prepare
Maturity and Position (MAP) statements according to the extant
instructions.
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Q2. What is the significance of Liquidity Ratio “Core deposits/Total
Assets”?
a) It measures the extent to which assets are funded through
stable deposit base.
b) It measures the extent to which illiquid assets are financed out
of core deposits.
c) It measures the extent to which volatile liabilities fund the
balance sheet.
d) None of the above.

Answer: A
Refer page no.489, Topic 17.9.
Explanation:
Sl. No. Ratio Significance Industry Average (in %)

2. Core Measures the extent to which 50.

deposits/Total assets are funded through
Assets. stable deposit base.

Core deposits = All deposits (including CASA) above 1 year + net

worth.
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Q3. The internal factors in banks that may potentially lead to
liquidity risk problems in Banks are given below. Which is not
included in this list?
a) The banks rely heavily on the short-term corporate Deposits
/wholesale deposits.
b) Concentration of deposits in the short-term Tenor.
c) Fewer placements of funds in long-term deposits.
d) Decreasing depositors' trust on the banking sector.

Answer: D
Refer page no.483, Topic 17.3.
Explanation:
POTENTIAL LIQUIDITY RISK DRIVERS:
The internal and external factors in banks that may potentially lead
to liquidity risk problems in Banks are as under:
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Internal Banking Factors External Banking Factors
High off-balance sheet exposures. Very sensitive financial market
depositors.
The banks rely heavily on the short- External and internal economic
term corporate Deposits/wholesale shocks.
deposits.
A negative gap (liability is more than Low/slow economic
the asset) in the maturity dates of performances.
assets and liabilities.
The banks' rapid asset expansions Decreasing depositors' trust on
exceed the available funds on the the banking sector.
liability side.
Concentration of deposits in the Non-economic factors.
short-term Tenor.
Less allocation in the liquid Sudden and massive liquidity
government instrument. withdrawals from depositors.
Fewer placements of funds in long- Unplanned termination of
term deposits. government deposits.
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Q4. Banks should have an explicit liquidity risk tolerance limit set
by the_______?
a) Board of Directors.
b) The Asset-Liability Management Committee (ALCO).
c) The Risk Management Committee.
d) MD & CEO.

Answer: A
Refer page no.483, Topic 17.3.
Explanation:
Liquidity Risk Tolerance:
Banks should have an explicit liquidity risk tolerance set by the
Board of Directors.
The risk tolerance should define the level of liquidity risk that the
bank is willing to assume, and should reflect the bank's financial
condition and funding capacity.
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Q5. Effective liquidity risk management is the management of
liquidity by raising sufficient funds by _______?
a) Increasing liabilities.
b) Converting assets promptly and at a reasonable cost.
c) Both a and b.
d) None of the above.

Answer: C
Refer page no.481, Topic 17.1.
Explanation: Effective liquidity risk management is the
management of liquidity by raising sufficient funds either by
increasing liabilities or by converting assets promptly and at a
reasonable cost.
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Q6. The Key Considerations in Liquidity Risk Management does not
include?
a) Availability of fixed assets.
b) Extent of volatility of the deposits.
c) Degree of reliance on volatile sources of funding.
d) Contingency plans.

Answer: A
Refer page no.482, Topic 17.2.
Explanation: Some Key Considerations in Liquidity Risk
Management include:
1. Availability of liquid assets.
2. Extent of volatility of the deposits.
3. Degree of reliance on volatile sources of funding.
4. Level of diversification of funding sources.
5. Historical trend of stability of deposits.
6. Quality of maturing assets.
7. Market reputation.
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8. Availability of undrawn standbys.
9. Impact of off-balance sheet exposures on the balance sheet.
10. Contingency plans.

Q7. To mitigate the potential for reputation contagion, a bank

should have?
a) A system of effective communication with counterparties.
b) A system of effective communication with Credit rating
agencies.
c) A system of effective communication with other stakeholders
when liquidity problems arise.
d) All of the above.

Answer: D
Refer page no.486, Topic 17.5.
Explanation: To mitigate the potential for reputation contagion, a
bank should have a system of effective communication with
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counterparties, credit rating agencies, and other stakeholders
when liquidity problems arise.
There are two simple ways of measuring liquidity; one is the stock
approach and the other, flow approach.

Q8. There are two simple ways of measuring liquidity. These two
ways are?
i) Stock approach. ii) Fund Flow approach.
iii) Cost approach. iv) Flow approach.

a) Only i and ii. b) Only ii and iii.

c) Only i and iii. d) Only i and iv.

Answer: D
Refer page no.489, Topic 17.8.2.
Explanation: Measurement of Liquidity Risk:
There are two simple ways of measuring liquidity; one is the stock
approach and the other, flow approach.
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Q9. Under_____method, certain ratios, like liquid assets to short
term total liabilities, purchased funds to total assets, core deposits
to total assets, loan to deposit ratio, etc., are calculated and
compared to the benchmarks that a bank has set for itself?
a) Fund Flow approach. b) Cost approach.
c) Stock approach. d) Flow approach.

Answer: C
Refer page no.489, Topic 17.8.2.
Explanation: Measurement of Liquidity Risk:
There are two simple ways of measuring liquidity; one is the stock
approach and the other, flow approach.
The stock approach is the first step in evaluating liquidity.
Under this method, certain ratios, like liquid assets to short term
total liabilities, purchased funds to total assets, core deposits to
total assets, loan to deposit ratio, etc., are calculated and
compared to the benchmarks that a bank has set for itself.
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Q10. _______approach looks at the liquidity requirements of
today, tomorrow, the day thereafter, in the next seven to 14 days
and so on. The maturity Ladder or time buckets, thus, constructed
helps in tracking the cash flow mismatches over a series of
specified time periods?
a) Fund Flow approach. b) Cost approach.
c) Stock approach. d) Flow approach.

Answer: D
Refer page no.489, Topic 17.8.2.
Explanation: The flow approach, on the other hand, forecasts
liquidity at different points of time.
It looks at the liquidity requirements of today, tomorrow, the day
thereafter, in the next seven to 14 days and so on.
The maturity Ladder or time buckets, thus, constructed helps in
tracking the cash flow mismatches over a series of specified time
periods.
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Q11. What is the Asset-Liability Management Committee (ALCO)
responsible for?
x) Ensuring adherence to the risk tolerance limits set by the Board.
y) Implementing the liquidity risk management strategy of the
bank in line with bank's decided risk management objectives and
risk tolerance.
z) Should be responsible for analyzing, monitoring and reporting
the Bank’s liquidity risk profile.

a) Only x and y. b) Only y and z.

c) Only x and z. d) Only z.

Answer: A
Refer page no.487, Topic 17.6.
Explanation: The Asset-Liability Management Committee (ALCO)
consisting of the bank's top management should be responsible for
ensuring adherence to the risk tolerance/limits set by the Board as
well as implementing the liquidity risk management strategy of the
bank in line with bank's decided risk management objectives and
risk tolerance.
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Q12. The Statement of Structural Liquidity is required to be
reported in _____ parts?
a) Two. b) Five.
c) Seven. d) Ten.

Answer: B
Refer page no. 493, Topic 17.16.
Explanation: The Statement of Structural Liquidity is required to be
reported in 5 parts:
Further, the statement is required to be reported in five parts viz.
1. For domestic currency, Indian operations. [Fortnightly]
2. For foreign currency, Indian operations. [Fortnightly]
3. For combined Indian operations. [Fortnightly]
4. For overseas operations' and for. [Monthly]
5. Consolidated bank operations. [Quarterly]
While statements at (i) to (iii) are required to be submitted
fortnightly, statements at (iv) and (v) are required to be submitted
at monthly and quarterly intervals, respectively. The periodicity in
respect of each part of the return is given in the table ahead.
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Q13. Which of the following ratio “measures the extent of
available liquid assets”?
a) Core deposits/Total Assets.
b) Temporary Assets/Total Assets.
c) Volatile Liabilities/Total Assets.
d) None of the above.

Answer: B
Refer page no.489, Topic 17.9.
Explanation:
Sl. No. Ratio Significance Industry
Average
(in %)
5. Temporary Measures the extent of available 40%.
Assets/Total Assets. liquid assets.
A higher ratio could impinge on
the asset utilization of banking
system in terms of opportunity
cost of holding liquidity.
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Q14. The overall responsibility for management of liquidity risk lies
with?
a) The Board of Directors.
b) The Risk Management Committee.
c) The Asset-Liability Management Committee.
d) The Asset-Liability Management Support Group.

Answer: A
Refer page no.495.

Q15. The role of deciding the transfer pricing policy of the bank
and making liquidity costs and benefits an integral part of bank’s
strategic planning is performed by?
a) The Chief Risk Officer.
b) The Board of Directors.
c) The Asset-Liability Management Committee.
d) The Asset-Liability Management Support Group.
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Answer: C
Refer page no.495.

Q16. In the risk management framework of the banks, which risk is

called as ‘Fatal Risk’?
a) Interest Rate Risk. b) Liquidity Risk.
c) Forex Risk. d) Legal Risk.

Answer: B
Refer page no.496.