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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A commercial bank accepts short-term deposits and uses them to fund longer-term fixed-rate loans. Which risk is most directly created by this maturity mismatch in the bank's balance sheet?

The maturity mismatch exposes the bank mainly to interest rate risk and funding liquidity risk. If rates rise, deposit costs reprice faster than fixed-rate loan income, and if depositors withdraw, the bank may struggle to refinance its long-term assets.

  1. ASettlement risk from delayed payment of trades
  2. BInterest rate risk and funding liquidity riskCorrect
  3. CModel risk from using an incorrect pricing formula
  4. DLegal risk from unenforceable contracts

Explanation

Funding long-term fixed-rate assets with short-term liabilities exposes the bank to rising funding costs (interest rate risk) and to the possibility that deposits cannot be rolled over (funding liquidity risk). The other risks may exist but do not arise directly from the maturity mismatch.

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