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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank's treasury wants to reduce rollover risk in its wholesale funding. Which action would most effectively achieve this?

Laddering maturities most effectively reduces rollover risk, because it ensures only a modest portion of wholesale borrowing falls due in any one period, so the bank never has to refinance a large amount at once, even in stressed market conditions.

  1. ALaddering maturities so that no large share of borrowings matures in any single periodCorrect
  2. BShifting all borrowing to overnight maturities to take advantage of lower rates
  3. CConcentrating issuance with a single relationship lender to negotiate better pricing
  4. DRaising the proportion of funding that is repriced daily

Explanation

Rollover risk arises when large amounts mature together and cannot be refinanced. Spreading maturities limits the amount that must be refinanced at any time. Overnight or single-lender funding increases rollover and concentration risk.

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