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FRM Part II · FRM Exam Part II · Monitoring Liquidity

A bank has USD 400 million of assets funded by USD 300 million of short-term wholesale funding, with the rest as equity. Of the assets, USD 60 million are cash and government bonds that can be sold at par. Which feature most directly creates the bank's structural liquidity vulnerability?

The main vulnerability is maturity transformation: short-term wholesale funding of USD 300 million supports mostly illiquid assets, with only USD 60 million readily saleable. If funding is withdrawn, the bank cannot meet outflows from liquid assets alone, whereas equity, liquid bonds and currency matching do not create this weakness.

  1. AShort-term liabilities funding assets that are largely illiquidCorrect
  2. BEquity capital of USD 100 million being too large
  3. CHolding government bonds that can be sold at par
  4. DHaving liabilities denominated in the same currency as assets

Explanation

Liquidity risk arises from maturity transformation: USD 300 million of short-term funding supports assets of which only USD 60 million are liquid, so a run on funding could not be met from liquid assets. Equity, liquid government bonds and currency matching reduce rather than create vulnerability.

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