FRM Part II · FRM Exam Part II · Monitoring Liquidity
A bank's treasurer distinguishes between funding liquidity risk and market liquidity risk. Which situation is the clearest example of market liquidity risk?
Selling a large bond block only at a price well below mid is market liquidity risk, because the asset cannot be liquidated without a price concession. Failed rollovers, deposit runs and collateral calls are funding liquidity risks, since they concern obtaining or retaining cash.
- AWholesale lenders refuse to roll over the bank's maturing commercial paper
- BThe bank must sell a large block of corporate bonds and can do so only at a price well below the quoted mid-priceCorrect
- CRetail depositors withdraw funds faster than forecast after a rumor
- DA counterparty demands additional collateral after a rating downgrade
Explanation
Market liquidity risk is the risk that an asset cannot be sold quickly without a significant price concession. The bond block sale at a discount to mid fits this. The other three are cash-outflow or funding-access problems, which are funding liquidity risk.
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