Lehman Brothers spent the weekend of September 13, 2008 trying to find $50 billion of overnight repo financing it had relied on the Friday before. The collateral was the same; the counterparties were the same; the only thing that had changed was that everyone now thought Lehman might fail. Repo is secured funding only when the market believes the borrower is solvent. The exam tests whether you understand that paradox.
A bank's liquidity reporting structure has four audiences, each with a different report. Operational dashboards for the Treasury desk update intraday and daily: funding gaps, collateral inventory, intraday usage, executed trades. ALCO weekly reports show pro-forma liquidity over 30/90/365 days, EWI status, and any limit breaches. Board monthly reports include trend, peer comparison, regulatory ratio status, and CFP readiness. Regulatory reports include LCR (daily monitoring, monthly filing in many jurisdictions), NSFR (quarterly), intraday liquidity (BIS seven monitoring tools), and supervisory stress tests.
The reports share a common structure: the liquidity position (cash and liquid securities net of short-term obligations), funding mix (deposits vs. wholesale, secured vs.
Common mistakes
- Treating repo as fully secured funding in stress. Repo is secured against collateral, but repo counterparties pull lines in stress and force fire sales of the collateral. Bear Stearns 2008 shows the classic pattern.
- Using historical-cost when pricing new loans. New loans must be funded with marginal cost, not blended carrying cost. A bank that prices new loans against blended cost will systematically underprice new business. Trap: the question gives both rates and asks "which spread is correct for new business decisions": marginal is the answer.
- Forgetting the haircut in repo cash advances. A $100M Treasury repo with 2% haircut advances $98M, not $100M. Interest accrues on the cash advance, not the collateral. Trap: a question asks for repo interest at $100M × repo rate × n/360, which is wrong; use $98M.
Bottom line
- Liquidity reports flow daily (operational dashboards) -> weekly (ALCO) -> monthly (board) -> regulatory (LCR, NSFR, intraday); encumbered assets are not buffer, so gross numbers overstate liquidity.
- Contingency Funding Plan (CFP) maps EWIs to escalation tiers and tiers to a defined action menu; triggers, owners, action options, and timelines must be pre-documented (tiered triggers, not subjective judgment).
- Non-deposit liabilities (federal funds purchased, repos, eurodollars, FHLB advances, brokered CDs, commercial paper) each trade off cost, tenor, stability, and regulatory treatment.
- Available funds gap = new loans + run-off + debt service - new deposits - loan repayments; it drives the funding plan.
Exam shortcut
When a question asks for repo interest, identify the cash advance (not collateral value) and apply the rate over the actual day count. The day-count basis is 360 (not 365) for US repo and most money-market instruments. The trap on the answer choices is using collateral value instead of the post-haircut cash advance.
The full lesson (about 3,703 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
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