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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

A bank's monitoring report shows that 55% of its wholesale funding matures within 30 days and that three counterparties provide 40% of that funding. Which monitoring concept does this chiefly illustrate, and what is the appropriate response?

This illustrates funding concentration risk, since a few counterparties and short maturities dominate wholesale funding. The suitable response is to set concentration limits and diversify counterparties, instruments and tenors so withdrawal by any one provider cannot cause a liquidity crisis.

  1. AFunding concentration; set limits and diversify counterparties and tenorsCorrect
  2. BMarket liquidity risk; widen bid-ask limits on the trading book
  3. CInterest rate risk; extend asset duration
  4. DCapital adequacy; raise the leverage ratio

Explanation

Heavy reliance on a few counterparties and short tenors is funding concentration, a core monitoring item. Management should set concentration limits and diversify sources and maturities. The other options address different risks.

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