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FRM Part I · FRM Exam Part I · Banks

A bank funds a 10-year fixed-rate loan book mainly with overnight wholesale deposits. During a market-wide disruption, lenders refuse to roll over the deposits. Which risk is most directly crystallized, and which Basel III measure is designed to limit the structural version of this vulnerability?

The bank faces funding liquidity risk from a maturity mismatch between long-dated loans and overnight funding. The Net Stable Funding Ratio is designed to limit this structural weakness by requiring stable funding over a one-year horizon relative to asset liquidity and maturity.

  1. ACredit risk; leverage ratio
  2. BFunding liquidity risk; Net Stable Funding RatioCorrect
  3. CMarket risk; Liquidity Coverage Ratio only
  4. DOperational risk; countercyclical capital buffer

Explanation

The failure to roll over short-term funding against long-dated illiquid assets is funding liquidity risk arising from maturity mismatch. The NSFR requires stable funding over a one-year horizon to limit structural mismatch. The LCR addresses 30-day stress resilience, so the 'LCR only' option is not the structural limit, and the others address different risks.

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