FRM Part II · FRM Exam Part II · Liquidity Risk
A bank's treasurer reviews a report showing that the bank can no longer roll over its short-term wholesale borrowing at acceptable prices, even though its assets are valued above its liabilities. Which type of risk is the bank primarily experiencing?
This is funding liquidity risk: the bank cannot roll over short-term wholesale borrowing at acceptable prices despite positive net worth. The problem lies in obtaining cash to meet obligations, not in selling assets at fair prices, which would be market liquidity risk.
- AFunding liquidity riskCorrect
- BMarket liquidity risk
- CBasis risk
- DSettlement risk
Explanation
Funding liquidity risk is the risk that a firm cannot meet its cash obligations or roll over funding when due, even if it is solvent on a balance sheet basis. Market liquidity risk concerns the inability to sell assets near fair value, which is not the issue described here.
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