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FRM Part II · FRM Exam Part II · Liquidity Risk

A bank's treasurer observes that short-term wholesale lenders are refusing to roll over unsecured funding, even though the bank's assets are still performing. Which description best characterizes this situation?

This is funding liquidity risk. The bank cannot refinance its short-term wholesale liabilities and so may fail to meet obligations as they fall due. Assets are still performing, so the problem is not credit losses or asset market depth but the inability to roll over funding.

  1. AMarket liquidity risk, because assets cannot be sold at fair prices
  2. BFunding liquidity risk, because the bank may be unable to meet obligations as they fall dueCorrect
  3. CCredit risk, because borrowers are failing to repay the bank
  4. DModel risk, because the bank's VaR estimate was too low

Explanation

Funding liquidity risk is the risk that a firm cannot meet cash or collateral obligations when due without unacceptable losses. Refusal to roll over wholesale funding is a direct example. Market liquidity risk concerns asset sale prices, which is not the main issue described here.

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