FRM Exam Part II · Managing Nondeposit Liabilities

Nondeposit Liabilities and Wholesale Funding Basics

Updated 11 October 2026 · Fact-checked

Nondeposit liabilities are funds a bank raises in the market instead of from core customer deposits. They include fed funds, repos, commercial paper, FHLB advances, brokered deposits and long-term debt. They are usually larger, faster to raise and more rate-sensitive, and they run off faster in stress. To solve questions, classify the source and judge its stability.

Understand Nondeposit Liabilities and Wholesale Funding Basics

A bank funds its assets with equity, core deposits and nondeposit liabilities. Core deposits come from retail and small business customers. They are small, insured, relationship-based and slow to leave. They are the bank's most stable and usually cheapest funding.

Nondeposit liabilities, also called wholesale funding or purchased funds, are raised from institutional lenders and markets. Examples: federal funds (unsecured overnight loans of reserve balances between banks), repurchase agreements (secured by securities), commercial paper (short-term unsecured notes, mostly from highly rated issuers), Eurodollar borrowings, FHLB advances (secured loans from Federal Home Loan Banks against eligible collateral), brokered deposits (deposits placed through a broker) and large time deposits and long-term debt.

Banks use them because core deposits may not grow as fast as loans. Wholesale funds can be raised in size, quickly, at a chosen maturity, and are priced at market rates. They let a bank grow, fine-tune its balance sheet and manage liquidity.

The cost is risk. Wholesale lenders are rate-sensitive, often uninsured and unsecured lenders watch credit quality closely. They can refuse to roll over funding fast. Secured sources like repo and FHLB advances depend on collateral and haircuts, which can rise in stress. Heavy reliance raises rollover risk, concentration risk and encumbrance of assets.

A key point: brokered deposits are insured deposits but are not core. They are rate-driven and can leave quickly, and regulators may restrict them for weaker banks. Judge funding by behaviour in stress, not by legal label.

Key formulas to remember

Funding structure: Total funding = Equity + Core deposits + Nondeposit (wholesale) liabilities; Use it to see how much of the balance sheet depends on market funding.
Wholesale funding ratio: Wholesale funding ratio = Nondeposit liabilities ÷ Total liabilities; Higher ratio means greater reliance on less stable funding. Definitions vary by institution, so follow the question.
Repo cash raised: Cash received = Collateral market value × (1 − haircut); A higher haircut means less cash against the same collateral.
Repo interest: Interest = Cash × repo rate × days ÷ 360; USD money-market convention is usually actual/360. Use the basis given.
Discount-basis CP cost: Annualized yield = (Face − Proceeds) ÷ Proceeds × 360 ÷ days; Use the question's stated day-count convention.

How to solve Nondeposit Liabilities and Wholesale Funding Basics questions

Use this method for any question on nondeposit funding.

1Identify each funding source named and say whether it is retail/core or wholesale.
2Mark each as secured (repo, FHLB advances) or unsecured (fed funds, CP, Eurodollars).
3Note maturity and insurance status: overnight, short, long; insured or uninsured.
4Judge behaviour in stress: who the lender is, how rate-sensitive, whether collateral haircuts can rise.
5If numbers are given, compute the required figure (cash raised, interest, ratio) with the stated day-count.
6Interpret: higher reliance means more rollover, concentration and liquidity risk.
7Pick the option that matches both the calculation and the risk logic.

Quickest way: Stability ranking shortcut

When to use it: Use when asked which funding source is most or least stable or most likely to run.

Rank from most stable to least: core insured retail deposits, long-term debt, term secured funding, brokered or large time deposits, overnight unsecured and short-term CP or repo.
Shorter maturity and more rate-sensitive lenders means less stable.
Secured funding is cheaper but adds collateral and haircut risk.
Eliminate options that call brokered deposits 'core' or wholesale funding 'always unstable'.

Common mistakes in Nondeposit Liabilities and Wholesale Funding Basics

Treating brokered deposits as core deposits because they are insured.
They are deposits on the balance sheet and carry deposit insurance.
Fix: Classify by stability. They are rate-driven and placed by brokers, so they behave like wholesale funds.
Calling repo unsecured funding.
Students mix it up with fed funds, which are both overnight.
Fix: Repo is secured by securities. Fed funds are unsecured.
Assuming secured funding carries no liquidity risk.
Collateral seems to remove the lender's credit concern.
Fix: Remember haircuts can rise and collateral can be refused, causing funding gaps in stress.
Computing repo cash as the full collateral value.
Forgetting the haircut.
Fix: Multiply market value by (1 − haircut) first.
Saying wholesale funding is always worse than deposits.
Overstating the risk lesson.
Fix: It is a legitimate tool. The risk lies in over-reliance, short maturities and concentration.

Worked examples

Example 1

A bank has total liabilities of $50 billion, of which core deposits are $32 billion, fed funds and repos $8 billion, commercial paper $4 billion, FHLB advances $3 billion and brokered deposits $3 billion. Compute the wholesale funding ratio, treating brokered deposits as wholesale.

Show the solution

Wholesale = 8 + 4 + 3 + 3 = $18 billion.
Check: 32 + 18 = 50, which matches total liabilities.
Ratio = 18 ÷ 50 = 0.36.

Answer: 36%. More than a third of liabilities depend on market-sensitive funding.

Example 2

A bank repos Treasury securities with a market value of $200 million at a 2% haircut for 7 days at a repo rate of 5.40% (actual/360). How much cash does it raise and what interest is due?

Show the solution

Cash = 200 × (1 − 0.02) = $196 million.
Interest = 196 × 0.054 × 7 ÷ 360.
196 × 0.054 = 10.584.
10.584 × 7 = 74.088; 74.088 ÷ 360 = 0.20580.
So interest ≈ $0.2058 million.

Answer: Cash raised is $196 million; interest is about $205,800.

Exam tips

Expect scenario questions asking which source is least stable or what happens when haircuts rise.
Read the day-count basis and haircut before calculating.
Know the secured versus unsecured split for each instrument.
Link wholesale reliance to rollover, concentration and liquidity risk, not just cost.
Watch for brokered deposits placed as a trap in 'core deposit' options.

Practice questions from Managing Nondeposit Liabilities

Nondeposit Liabilities and Wholesale Funding Basics: frequently asked questions

What is the difference between core deposits and wholesale funding?

Core deposits are stable, relationship-based funds from retail and small business customers. Wholesale funding is raised from institutions and markets. It is larger, more rate-sensitive and runs off faster in stress.

Why do banks use nondeposit funding?

Deposits may not grow as fast as lending. Wholesale funds can be raised quickly, in size and at chosen maturities, which helps growth and liquidity management.

Are FHLB advances secured or unsecured?

They are secured. Federal Home Loan Banks lend against eligible collateral such as mortgages or securities.

Are brokered deposits core deposits?

No. They are insured but placed through brokers and chase rates, so they are treated as less stable. Regulators may restrict them at weaker banks.