When assessing liquidity risk for a client liquidity event, which elements should be evaluated?

• A. Cash flow timing, funding sources, market liquidity, and potential liquidity facilities
• B. Cash flow timing, funding sources, market liquidity, potential liquidity facilities, and stress testing
• C. Cash flow timing and funding sources only
• D. Market liquidity and stress testing only

Answer: (B)

When evaluating liquidity risk during a client liquidity event, you want a complete view of how the client would meet obligations under stress. Start with cash flow timing: map when cash is expected to come in versus when obligations hit, because a mismatch can quickly erode available liquidity even if total resources are large. Then look at funding sources: what lines of credit or committed facilities exist, how reliable they are under strain, and whether funding is diversified rather than dependent on a single source. Next, assess market liquidity: the ease and cost of converting assets to cash in stressed conditions, since illiquid markets can prevent timely access to funds or force fire-sale losses. Also include potential liquidity facilities that could be mobilized in a crunch, such as standby lines or backup arrangements, to provide additional optionality. Finally, incorporate stress testing: scenario analyses that simulate adverse conditions to reveal potential shortfalls, test the effectiveness of contingency plans, and quantify resilience.

Putting these elements together gives a robust assessment of liquidity risk because it covers timing, sources, market conditions, backup options, and resilience under stress. Omitting any of these parts can leave gaps—without stress testing you might underestimate how severe a crisis could be, or without market liquidity and facilities you might not see how quickly liquidity could deteriorate or how you would recover.