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

A regional bank funds 45% of its balance sheet with wholesale borrowings, and most of these come from only three large institutional providers. Which risk is most directly heightened by this funding structure?

Funding concentration risk is most heightened, because dependence on three large wholesale providers means that if any one withdraws or reprices, the bank could face a sudden and large funding gap. Diversifying across providers, instruments and maturities reduces this exposure.

  1. AFunding concentration risk, because loss of one provider could create a sudden funding gapCorrect
  2. BBasis risk, because deposit and loan rates may move differently
  3. CPrepayment risk, because borrowers may repay loans early
  4. DSettlement risk, because payments may fail to clear on the same day

Explanation

Reliance on a few large providers means that withdrawal or repricing by any one of them can remove a large share of funding abruptly. The other risks are not driven by provider concentration. Diversifying providers, instruments and maturities is the standard response.

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