medium · FRM Part 2 Risk & Investment Management
In the context of Liquidity Risk, the 'Denominator Effect' refers to which of the following scenarios?
- A bank's structural inability to roll over its short-term wholesale funding sources during a systemic market-wide liquidity freeze.
- The inability to meet collateral margin calls promptly due to a shortage of available high-quality liquid assets (HQLA) on the balance sheet.
- A sharp decline in public equity prices causes the weight of illiquid private assets in a portfolio to mechanically rise above its target limit.
- The increase in the bid-ask spread on a given security as a direct result of a decrease in market depth and reduced dealer willingness to make markets.
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