Skip to content

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

A bank relies heavily on overnight and short-dated commercial paper rolled over repeatedly to fund term assets. During a market shock, money market investors refuse to buy new paper. Which feature of this funding most directly explains the bank's exposure?

The exposure is rollover risk. Short-term commercial paper matures frequently and must be reissued to keep funding term assets, so if investors withdraw from the market the bank cannot refinance and faces a sudden liquidity gap.

  1. ARollover risk, because maturing paper must be refinanced in a market that may closeCorrect
  2. BInterest rate floor risk, because coupons reset downward
  3. CReserve requirement risk, because paper is subject to deposit reserves
  4. DDeposit insurance premium risk, because paper is insured by the FDIC

Explanation

Short-term paper must be refinanced frequently, so a market closure creates a funding gap. Commercial paper is not insured and is not subject to reserve requirements, so the other options misdescribe the instrument.

Did you get it right without looking?

One question tells you little. A timed set on Managing Nondeposit Liabilities shows your real accuracy, how long you take and where you lose marks.

Practise Managing Nondeposit LiabilitiesFree diagnostic mock

More Managing Nondeposit Liabilities questions