CAIIB · Bank Financial Management · Module B — Risk Management
CAIIB BFM Unit 17 — Liquidity Risk Management: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper II of the December 2026 cycle (Saturday 12 December 2026)
This is the free practice page for CAIIB BFM Unit 17 — Liquidity Risk Management (Module B — Risk Management). The CAIIB Mock Centre holds 184 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
BFM · Module B184 MCQs in the Mock Centre5 free belowPaper on 12 December
Key facts examiners test from this unit
Liquidity risk, drivers and types — liquidity is paying what falls due, at reasonable cost; solvency is owning more than you owe; a solvent bank can still fail from a run.
The Basel principles — Basel's September 2008 paper has 17 principles (13 for banks, 4 for supervisors): one fundamental, three on governance, eight on measurement and management, one on disclosure.
Governance, policy and measurement — the Board owns liquidity risk and sets the tolerance; the ALCO runs it; the ALM Support Group measures it; the flow approach (maturity ladder) beats the stock approach.
Changed since the textbook
Financial Stability Report, June 2026 (30 Jun 2026). RBI released its Financial Stability Report on 30 June 2026. Banks' LCR was 124.2% and NSFR 122.1% in March 2026; in RBI's liquidity stress test the aggregate LCR falls from 123.7% to 116.7%, and to 110.8% in the harsher scenario, where three banks would miss the minimum. Source: RMA India
Revised LCR run-off rates take effect (1 Apr 2026). RBI's circular of 21 April 2025 took effect: retail and small-business deposits that customers can move through internet or mobile banking (including UPI) carry an extra 2.5% run-off, so stable deposits go from 5% to 7.5% and less stable ones from 10% to 12.5%; Level 1 government securities count at market value less LAF/MSF haircuts; funding from non-financial trusts, partnerships and LLPs runs off at 40% instead of 100%. Source: Business Standard
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 184 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
Under the BCBS fundamental principle (Principle 1), a bank's liquidity risk management framework should ensure that it maintains sufficient liquidity, including:
Why (a): Principle 1 calls for a robust framework and a cushion of unencumbered, high-quality liquid assets to withstand stress events. (b) is wrong: Long-term loans are illiquid. (c) is wrong: A capital buffer addresses solvency, not liquidity. (d) is wrong: The principle puts the responsibility on the bank itself.
Question 2 of 5
Principle 12 asks banks to hold a cushion of unencumbered, high-quality liquid assets. What condition does it add?
Why (d): Principle 12 treats the liquidity cushion as insurance against severe stress, so the assets must be unencumbered and usable to raise funds without legal, regulatory or operational impediment. Pledging them in advance would encumber them, and neither location nor currency is the test. (a) is wrong: Location is not the condition; usability is. (b) is wrong: Pledged assets are encumbered. (c) is wrong: Currency is not the condition.
Question 3 of 5
Under which heading do the principles on intraday liquidity (8) and collateral (9) fall?
Why (c): Principles 5 to 12, including intraday liquidity and collateral, fall under measurement and management. (a) is wrong: The fundamental principle is Principle 1 alone. (b) is wrong: Governance covers Principles 2 to 4. (d) is wrong: Disclosure is Principle 13.
Question 4 of 5
When the tolerance is expressed as a minimum survival horizon, the horizon is measured:
Why (c): A survival horizon measures how long the bank could meet its obligations under severe but plausible stress using its own resources, so it is measured without assuming central bank or government support; free central bank lending, normal conditions or early repayments would overstate it. (a) is wrong: The test assumes no official support. (b) is wrong: It is a stress measure. (d) is wrong: Early repayment is not a stress assumption.
Question 5 of 5
What does the ratio of core deposits to total assets measure?
Why (a): Ratio 2 measures funding through a stable deposit base; its industry average is 50%. (b) is wrong: That is ratio 3. (c) is wrong: That is ratio 6. (d) is wrong: None of the seven ratios measures capital.
0 of 5 answered.
Traps in this unit
A solvent bank can face a run.
Outside liabilities exclude equity.
Encumbered assets are not part of the cushion.
Practise all 184 questions on Unit 17. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the BFM Online Mock Centre unlocks all 7,600+ BFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
Independent study aid — not affiliated with, endorsed by, or sponsored by the Indian Institute of Banking & Finance (IIBF). Exam pattern, dates, fees and passing criteria are set by IIBF — always confirm the current rules at iibf.org.in. CAIIB content follows rules and developments up to IIBF's cut-off of 30 June 2026 (where a rule changed later, the update box says so); verify from official sources before relying on them in practice.