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

A bank's funding is mostly short-term wholesale borrowing, while its assets are long-dated loans. Which risk is most directly highlighted by this structure?

Financing long-dated loans with short-term wholesale funds creates rollover, or funding liquidity, risk from a maturity mismatch. If lenders refuse to renew, the bank must find replacement funding or sell assets, possibly at a loss.

  1. ARollover (funding) liquidity risk from a maturity mismatchCorrect
  2. BPure credit spread risk on the loan book only
  3. CForeign exchange translation risk
  4. DModel risk in the bank's VaR engine

Explanation

Financing long assets with short liabilities means funding must be repeatedly rolled over. If markets close, the bank may be unable to refinance, creating funding liquidity risk. The other risks are not the direct consequence of this mismatch.

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