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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank must choose among funding sources for a new USD 300 million need. Which choice is most consistent with sound funding strategy under stress, assuming the bank wants to limit dependence on market confidence?

The sound choice is a mix of stable retail deposits and term debt while retaining unencumbered high-quality collateral for secured funding. This limits reliance on confidence-sensitive markets and preserves a contingency buffer, unlike unsecured interbank funding, full encumbrance of liquid assets or unlimited short-term FX swap funding.

  1. ARaise it entirely through unsecured interbank borrowing because it is the cheapest in normal markets
  2. BRaise a mix of stable retail deposits and term debt, while keeping a secured funding capacity backed by unencumbered high-quality collateralCorrect
  3. CRaise it entirely via repo against the bank's only liquid securities, fully encumbering them
  4. DRaise it through short-term foreign currency swaps that fund domestic currency assets without any limits

Explanation

Stable deposits and term debt reduce reliance on confidence-sensitive markets, and retained unencumbered collateral preserves contingent secured capacity. Fully encumbering assets removes the buffer, and unsecured interbank funding or unlimited FX swap funding is vulnerable to market freezes.

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