Appraise the building blocks of a contingency funding plan, covering oversight and governance, scenario work including liquidity gap analysis, actions to take if needed, escalation and monitoring, plus the supporting data and reports.
The idea
A CFP has five building blocks. Governance means the board sets liquidity risk appetite and approves the plan, while a senior crisis team with clear decision rights activates it. Scenario work includes a liquidity gap analysis, which lays stressed cash inflows against outflows by time bucket. The cumulative gap, compared with the usable buffer after haircuts, shows the shortfall and when it appears. Actions are a ranked list of funding sources and asset sales with expected amounts, haircuts and time to cash. Escalation and monitoring use early warning indicators to watch for deterioration, and defined triggers move the matter up the chain. Data and reports must be timely and granular, by entity, currency and collateral. The exam point is that each block must connect to the others, with timing as the common thread.
A practice question
Which element belongs to the oversight and governance building block of a contingency funding plan?
- A table of cumulative net outflows by time bucket under the stressed scenario.Why not: This is scenario and gap analysis, not governance.
- A list of unencumbered assets that can be sold or pledged, with expected haircuts.Why not: This is the actions block: sources and their expected cash, not who decides.
- A daily report of funding spreads and deposit outflows used to monitor the bank.Why not: This is escalation and monitoring: indicators, not decision rights.
- Board approval of the plan and a crisis team with clear decision rights to activate it. - correct
Governance covers who owns, approves and activates the plan: board oversight, the crisis team and delegated authorities. The other options describe other blocks of the plan.
A harder one
A bank's stressed liquidity gap analysis shows cash inflows of USD 120 million, 150 million and 200 million, and outflows of USD 310 million, 240 million and 260 million, in the buckets 1 to 7 days, 8 to 14 days and 15 to 30 days. The usable buffer after haircuts is USD 250 million. By how much does the cumulative 30-day gap exceed the buffer?
- USD 560 millionWhy not: Ignores inflows: total outflows of 810 less the buffer of 250.
- USD 340 millionWhy not: Stops at the cumulative gap and forgets to deduct the buffer.
- USD 90 million - correct
- USD 590 millionWhy not: Wrong sign on the buffer: 340 + 250 instead of 340 - 250.
Net gaps: 190, 90 and 60, so the cumulative gap is 340 after 30 days (280 after 14 days, already above the buffer). The shortfall = 340 - 250 = 90.
The hardest tier
A bank's stressed 30-day cumulative gap is USD 900 million. Its buffer has a market value of USD 600 million with a 10% haircut. The plan lists: repo of unencumbered bonds, market value USD 400 million at a 25% haircut, cash in 5 days; sale of a loan portfolio of USD 150 million at 92% of face, cash in 20 days; a committed credit line of USD 100 million, assumed unavailable in stress; and a securitisation of USD 80 million taking 45 days. Closest to what surplus of usable actions over the shortfall does the plan have within the 30-day horizon?
- USD 258 millionWhy not: Counts the unavailable credit line and the securitisation that closes after day 30: 618 - 360.
- USD 190 millionWhy not: Ignores the haircut and the sale discount: 400 + 150 = 550, less the 360 shortfall.
- USD 78 million - correct
- USD 138 millionWhy not: Does not apply the 10% haircut to the buffer, so uses a shortfall of 300 instead of 360.
Usable buffer = 600 x 0.9 = 540, shortfall = 900 - 540 = 360. Actions in horizon: repo 400 x 0.75 = 300, loan sale 150 x 0.92 = 138, total 438. Surplus = 438 - 360 = 78. The credit line and 45-day securitisation are excluded.
In the app: 6 practice questions on this outcome, spaced review that brings it back before you forget it.
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