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FRM Part I · FRM Exam Part I · Banks

A bank's balance sheet shows total assets of USD 500 million, of which USD 40 million is cash and reserves at the central bank. Which description best fits the bank's primary role as a financial intermediary?

A bank's primary intermediary role is taking deposits and other funding and lending them at higher rates, earning a spread while transforming maturity, size and liquidity. This differs from brokers, which merely match counterparties without using their own balance sheet to hold the resulting risks.

  1. AIt earns a spread by taking deposits and lending the funds at higher rates, transforming maturity and size of claimsCorrect
  2. BIt acts solely as an agent matching buyers and sellers without taking balance sheet risk
  3. CIt holds only equity capital and invests it in marketable securities
  4. DIt issues insurance contracts to cover credit losses on its loans

Explanation

Banks gather deposits and other funding and lend them out, earning net interest margin while transforming maturity, liquidity and size. Pure agency matching without balance sheet risk describes a broker, not a bank's core intermediation function.

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