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

A bank's funding comprises $600m stable retail deposits, $300m of 3-month unsecured wholesale funding, and $100m of overnight repo against government bonds. Management considers moving $200m of retail deposits into 3-month wholesale funding to save cost. Which statement best describes the effect on liquidity risk?

Liquidity risk rises. Replacing stable retail deposits with three-month wholesale funding lifts the wholesale share from 40% to 60% of funding and makes the bank more dependent on frequent rollovers and market confidence, even though total funding is unchanged.

  1. ALiquidity risk falls because wholesale funding has a lower cost
  2. BLiquidity risk is unchanged because total funding is unchanged
  3. CLiquidity risk rises because funding becomes less stable and more rollover-dependent, with wholesale share rising from 40% to 60%Correct
  4. DLiquidity risk falls because the average maturity of liabilities lengthens

Explanation

Retail deposits are generally stickier. Moving $200m into 3-month wholesale raises the wholesale share from (300+100)/1000=40% to 60% and increases rollover and confidence-sensitivity. Cost savings do not reduce liquidity risk, and average maturity does not lengthen.

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