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

A bank wants to reduce its dependence on any single wholesale provider. Which policy best supports funding diversification for nondeposit liabilities?

The best policy is to set and monitor concentration limits by counterparty, instrument type and maturity bucket. This spreads rollover risk so that the withdrawal of any single provider or market segment cannot cause a severe funding shortfall, though contingency planning is still required.

  1. ASetting limits on concentration by counterparty, instrument type, and maturity bucket, and monitoring them regularlyCorrect
  2. BConcentrating all funding with the single cheapest provider to minimize cost
  3. CFunding exclusively with overnight instruments to preserve flexibility
  4. DEliminating all contingency funding plans because diversification removes liquidity risk

Explanation

Diversification is implemented through limits across counterparties, instruments, and maturities, which reduces the chance that one provider's withdrawal creates a funding crisis. Concentrating with one provider or relying on overnight funding increases risk, and diversification does not remove the need for contingency planning.

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