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FRM Part I · FRM Exam Part I · Banks

A bank funds a 10-year fixed-rate loan portfolio of USD 200 million with 3-month wholesale deposits. Which risk is most directly created by this structure?

Funding 10-year fixed-rate loans with 3-month deposits creates maturity mismatch, exposing the bank to both liquidity risk, because funding must be rolled over frequently, and interest rate risk, because funding costs reprice upward while loan income remains fixed. Currency or settlement risk is not involved here.

  1. ALiquidity risk and interest rate risk from maturity mismatch, as funding reprices and rolls over far sooner than assetsCorrect
  2. BForeign exchange risk because deposits and loans are in different time zones
  3. CSettlement risk arising from delivery-versus-payment failures
  4. DModel risk from using a binomial tree to price the loans

Explanation

Short-term liabilities must be rolled over frequently while assets are long-dated and fixed-rate. If rates rise, funding costs increase while loan income is fixed, and if funding markets freeze the bank cannot repay. No currency, settlement or model feature is described.

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