A stock of liquid assets held to meet cash needs in a stress. Its size is set by stress testing.
Where you will meet it
Liquidity buffer comes up in 4 learning outcome notes across the FRM syllabus.
A few of them:
Contingency Funding Planning FRM Part II · Liquidity and treasury risk measurement and management
“A liquidity stress test measures how large, how fast and in which currencies cash would drain under defined scenarios, and how much of the liquidity buffer is still usable after haircuts.”
Illiquid Assets FRM Part II · Risk management and investment management
“The optimal allocation is smaller than a frictionless model would give, because the investor must keep a liquidity buffer for obligations and cannot exit in a bad market.”
Managing Non-Deposit Liabilities FRM Part II · Liquidity and treasury risk measurement and management
“The usual errors are reversing the sign, leaving out the liquidity buffer or the loan growth, and counting volatile deposits as core.”
Managing Non-Deposit Liabilities FRM Part II · Liquidity and treasury risk measurement and management
“A weaker credit standing pushes a bank towards secured sources, but heavy repo use encumbers assets and shrinks the liquidity buffer.”
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