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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank holds USD 400 million of large time deposits (above the insured limit) from corporate treasurers, all maturing within 90 days. Which assessment of their run-off behavior is most appropriate for liquidity stress testing?

Large uninsured time deposits should be stressed with low renewal rates, because informed corporate depositors tend not to roll over when concern about the bank rises. Since all mature within 90 days, most of the balance is exposed to non-renewal, so normal-condition rollover or retail assumptions understate outflows.

  1. ARun-off should equal zero until contractual maturity because depositors cannot withdraw early, so only maturity rollover matters
  2. BRun-off should be assumed identical to stable insured retail deposits
  3. CRun-off should be assumed to equal the average rollover rate in normal conditions
  4. DUninsured wholesale-type time deposits should be assumed to roll over at lower rates under stress, with the maturing portion at high risk of non-renewalCorrect

Explanation

Large uninsured depositors are informed and rate- and credit-sensitive, so under stress they are likely not to renew at maturity. With all funds maturing within 90 days, nearly all are exposed to non-renewal within the horizon. Using normal-time rollover or retail stability assumptions understates stress outflows.

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