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

A bank relies on overnight unsecured interbank borrowing to fund a large portion of its balance sheet. Which action best reduces its roll-over risk from nondeposit funding while keeping funding cost reasonable?

Diversifying counterparties and maturities, laddering the maturity profile and holding an unencumbered liquid buffer best cuts roll-over risk. Concentration, shorter tenors or fully encumbering the best assets all increase vulnerability to funding withdrawal.

  1. AShift to a diversified mix of counterparties and maturities, with a laddered maturity profile and an unencumbered liquid asset bufferCorrect
  2. BConcentrate funding with the single cheapest lender to secure a volume discount
  3. CShorten all wholesale maturities so that liabilities reprice faster
  4. DReplace unsecured funding with secured funding using all of the bank's highest-quality assets as collateral

Explanation

Diversification by counterparty and tenor, laddering maturities and holding a liquid buffer reduce roll-over concentration. Single-lender concentration and shorter tenors raise risk; pledging all best assets leaves no unencumbered buffer and increases encumbrance.

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