medium · FRM Part 2 Liquidity & Treasury Risk
A bank has $5 bn of unencumbered Treasury bonds in its HQLA pool. To use these for an intraday 11:00 AM payment, it must first repo them for cash.
If the repo market is experiencing a 'dash-for-cash' stress, what is the most likely outcome?
- The bank will automatically receive an emergency overnight loan from the International Monetary Fund to cover the intraday cash shortfall that it currently faces.
- The bank may be unable to find a counterparty to provide cash, or may face significantly higher haircuts, preventing it from meeting its payment obligation on time.
- The LCR ratio will automatically and immediately rise to 200% across all reporting banks nationwide in order to fully compensate for the market-wide stress.
- The bank's NSFR will improve immediately because the previously unencumbered Treasury bonds are now being actively pledged as collateral for cash in the overnight repo market.
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