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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A bank's treasurer notes that the bank can no longer roll over its maturing wholesale certificates of deposit at acceptable cost, even though its bond portfolio can still be sold at quoted prices with tight bid-ask spreads. Which type of liquidity risk is most directly illustrated?

This is funding liquidity risk. The bank cannot roll over its maturing wholesale liabilities at acceptable cost, which is a problem of raising cash to meet obligations. Market liquidity is not the issue because its securities still trade with tight bid-ask spreads.

  1. AFunding liquidity riskCorrect
  2. BMarket liquidity risk
  3. CBasis risk
  4. DSettlement risk

Explanation

Funding liquidity risk is the risk that a firm cannot meet its cash and collateral obligations when due, or can do so only at high cost. Here the inability to roll over liabilities is a funding problem. Market liquidity is fine because assets still trade at tight spreads, so option B is wrong.

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