Liquidity Stress Testing (FRM Part 2 2025 – Book 4 – Chapter 9)

Master Liquidity Stress Testing for FRM Part 2 – Book 4 (Liquidity and Treasury Risk Measurement and Management), Chapter 9. In this lesson, Prof. Forjan explains liquidity types (operational, restricted, contingent, strategic), the liquid asset buffer, simple buffer calculations, and how to design robust liquidity stress tests, including scenarios, assumptions, outputs, governance, and integration with capital and ALM models.
Perfect for FRM candidates preparing for exam questions on liquidity risk and treasury risk.

What you’ll learn:
Liquidity types and funding liquidity risk
Normal vs stressed liquid asset buffer and a quick estimation example
Historical vs hypothetical scenarios, model assumptions, outputs
Governance: ALCO, first/second/third lines of defense
Integration with capital stress testing, ALM, and FTP

Resources: AnalystPrep’s FRM study notes, question bank, mock exams, and concept capsules.

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After completing this reading, you should be able to:
Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity.
Estimate contingent liquidity via the liquid asset buffer.
Discuss the matters about the liquidity stress test design, such as scope, scenario development, assumptions, outputs, governance, and integration with other risk models.

0:00 Introduction
1:05 A Brief Recap...
4:52 Various types of Liquidity
14:19 Liquidity Stress Test Design
22:40 Types of Liquidity Stress Scenarios
29:24 Outputs of the Model
32:24 Governance and Control
36:02 Integration with Other Risk Models

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