FRM Part II · FRM Exam Part II
Managing Nondeposit Liabilities for FRM Part II
Nondeposit liabilities are funds a bank raises outside core deposits: fed funds, repo, commercial paper, Eurodollars, FHLB advances, long-term debt and brokered or large time deposits. To solve questions, identify the source, its cost, maturity and collateral, then judge rollover and liquidity risk and how concentration could cut off funding.
What this chapter covers
This chapter covers how banks fund themselves when core deposits are not enough. You study short-term wholesale markets such as federal funds, repurchase agreements (repos), commercial paper and Eurodollars. You then study secured and longer-term sources: FHLB advances, central bank facilities, long-term debt, brokered deposits and large time deposits.
The common thread is a trade-off. Wholesale funds are fast, scalable and often cheap. But they are rate-sensitive, often uninsured or runnable, and can vanish in stress. Secured funding lowers credit risk for the lender but ties up collateral and can lead to encumbrance of assets. Each source differs in maturity, cost, investor base and how it behaves in a crisis.
This links directly to the Liquidity and Treasury Risk Measurement and Management topic of the paper. It feeds into liquidity ratios such as the LCR and NSFR, funding stress tests, contingency funding plans and funds transfer pricing. It also connects to market risk through interest rate gaps and to credit risk through the bank's own credit spread. Expect applied questions that give a funding mix and ask you to spot the weakness.
Funding questions are scenario-based, and this chapter gives you the vocabulary and logic to answer them quickly. The same ideas recur across liquidity, Basel liquidity standards and case-style items on bank failures. If you can rank funding sources by stability, cost and collateral need, and explain why concentration hurts, you can pick the right option even when the question is worded in an unfamiliar way. Few topics reward clear reasoning over memorisation as much as this one.
Managing Nondeposit Liabilities: topics in the order to study them
- 1Nondeposit Liabilities and Wholesale Funding BasicsStart here to learn the definitions, the contrast with core deposits and the basic trade-offs that every later topic builds on.
- 2Federal Funds and Repurchase AgreementsThese are the core overnight and short-term markets, and repo introduces collateral, haircuts and margin, which you need for secured funding.
- 3Commercial Paper, Eurodollars and Other Market FundingNext, move to unsecured market funding to compare it with repo on cost, investor base and rollover risk.
- 4Secured Funding: FHLB Advances and Central Bank FacilitiesThis builds on repo and collateral ideas and shows how banks use official and quasi-official backstops.
- 5Long-Term Debt, Brokered and Large Time DepositsStudy longer-dated and deposit-like wholesale sources after short-term ones, so you can compare stability against cost.
- 6Managing Funding Concentration, Cost and Liquidity RiskFinish with the management view, which pulls all sources together into diversification, limits and contingency planning.
How to prepare Managing Nondeposit Liabilities
Treat each funding source as a profile you can compare, not a fact sheet to memorise. Build the profile once, then reuse it in scenario questions.
- Make a one-page comparison grid with rows for each source and columns for maturity, secured or unsecured, typical lender, cost, and behaviour in stress.
- For repo, practise the mechanics: collateral value, haircut, cash received and what happens when collateral value falls or the haircut rises.
- Learn which sources are secured and what they require, so you can judge encumbrance and how much unencumbered collateral is left.
- Link each source to the liquidity ratios: think about which sources count as stable funding and which run off quickly in a 30-day stress.
- Practise scenario questions where a bank relies heavily on one source or one lender type, and name the concentration, rollover and cost risks.
- Review the management tools: diversification across tenor and counterparty, limits, funds transfer pricing and contingency funding plans.
- Finish with timed mixed questions and note why each wrong option fails, not only why the right one works.
Common mistakes in Managing Nondeposit Liabilities
Treating all wholesale funding as equally unstable.
Fix: Rank sources by maturity, collateral and investor type. Long-term debt and secured central bank access behave very differently from overnight unsecured funds.
Treating repo as a true sale with no ongoing exposure.
Fix: Remember it works as secured borrowing. The borrower still faces rollover, haircut and margin call risk.
Assuming secured funding removes liquidity risk.
Fix: Ask whether eligible collateral will remain available and whether its value or haircut can worsen. Secured funding shifts the risk to collateral management.
Focusing only on cost when choosing funding.
Fix: Weigh cost against stability, tenor and run risk. The cheapest source is often the least reliable in stress.
Ignoring concentration within an apparently diversified mix.
Fix: Check concentration on several dimensions: product, counterparty, maturity date and currency.
Confusing Eurodollars with euro-denominated funding.
Fix: Eurodollars are US dollar deposits held outside the United States, whichever country holds them.
Last-day revision: Managing Nondeposit Liabilities
- Nondeposit liabilities are funds raised outside core deposits, mainly in wholesale markets.
- Wholesale funding is scalable and fast but more rate-sensitive and less stable than core deposits.
- Federal funds are unsecured, typically overnight, lent between depository institutions.
- A repo is a sale of securities with an agreement to repurchase later; economically it is secured borrowing.
- A higher haircut means less cash raised against the same collateral.
- Commercial paper is unsecured, short-term and generally issued by strong credits; it depends on investor confidence.
- Eurodollars are US dollar deposits held outside the United States.
- FHLB advances and central bank facilities are secured and require eligible collateral.
- Secured funding can cause asset encumbrance, reducing collateral available in stress.
- Longer-term debt lowers rollover risk but usually costs more.
- Brokered and large uninsured deposits can leave quickly when confidence or rates change.
- Concentration by source, tenor, counterparty or currency raises the chance of a funding shock; diversify and keep a contingency funding plan.
Managing Nondeposit Liabilities practice questions
- A corporation issues 90-day commercial paper with a face value of USD 10,000,000 at a discount yield of 4.80% on a 360-day basis. What is th…
- A bank wants to reduce its dependence on any single wholesale provider. Which policy best supports funding diversification for nondeposit li…
- A bank's treasury wants to reduce rollover risk in its wholesale funding. Which action would most effectively achieve this?
- A bank treasurer sees that 60% of the bank's wholesale funding comes from three money market funds. Which metric would best quantify this co…
- A bank relies on overnight unsecured interbank borrowing to fund a large portion of its balance sheet. Which action best reduces its roll-ov…
- Which feature of Eurodollar deposits is most relevant to a bank treasurer using them as a funding source?
- During a market disruption, money market funds stop buying a bank's commercial paper, and the bank cannot roll maturing paper. Which action …
- Which statement about Eurodollar deposits used by banks as a funding source is correct?
Managing Nondeposit Liabilities in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Managing Nondeposit Liabilities: frequently asked questions
What are nondeposit liabilities in FRM Part II?
They are funding sources a bank uses other than core customer deposits. Examples are federal funds, repos, commercial paper, Eurodollars, FHLB advances, long-term debt and brokered or large time deposits.
How does this chapter connect to liquidity risk?
It describes the funding side of liquidity risk. The stability, collateral needs and concentration of each source decide how a bank copes in a stress, and feed into liquidity ratios and contingency funding plans.
Do I need to memorise numbers for this chapter?
Mostly you need concepts and relationships, such as how haircuts change cash raised and which sources are secured. Practise any simple calculations, but focus on interpretation and ranking of funding sources.
What is the difference between secured and unsecured wholesale funding?
Secured funding, such as repo and FHLB advances, is backed by collateral, so lenders charge less but the bank must pledge assets. Unsecured funding, such as fed funds and commercial paper, needs no collateral but depends on the bank's creditworthiness.
How should I revise this chapter in the last few days?
Rework your comparison grid, rehearse repo and haircut mechanics, and do scenario questions on concentration. Then read your list of common mistakes once more before the exam.