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

A bank's funding manager notes that the institution relies heavily on wholesale funding maturing within one week to finance long-term loans. Which type of liquidity risk is most directly highlighted, and what is the appropriate policy response?

This is funding liquidity risk, arising from rollover exposure when long-term loans are financed by one-week wholesale funds. The appropriate policy response is to set limits on maturity mismatch and concentration of short-term wholesale funding.

  1. AMarket liquidity risk; set tighter bid-ask spread limits
  2. BFunding liquidity risk; set limits on maturity mismatch and concentration of short-term wholesale fundingCorrect
  3. CCredit risk; increase loan loss provisions
  4. DOperational risk; add further settlement staff

Explanation

Financing long-term assets with very short-term wholesale liabilities creates rollover risk, a funding liquidity problem. Policy should limit maturity gaps and funding concentrations. Market liquidity concerns the ability to sell assets without price impact, which is not the central issue here.

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