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

A regional bank has funded part of its loan book with federal funds purchased, repurchase agreements, commercial paper and Federal Home Loan Bank advances. Which characteristic most clearly distinguishes these nondeposit liabilities from core retail deposits for liquidity risk purposes?

Nondeposit wholesale funding is typically rate-sensitive and uninsured, and sophisticated providers pull it quickly when they doubt the bank's credit quality. This makes it less stable than core retail deposits, which are usually insured and sticky, so it carries greater liquidity and rollover risk.

  1. AThey are generally more rate-sensitive and less stable, so they can run off quickly when the bank's credit quality is questionedCorrect
  2. BThey are always insured and therefore carry no run risk
  3. CThey never require collateral or credit assessment by the provider
  4. DThey are always longer in maturity than retail deposits

Explanation

Nondeposit (wholesale) funding is supplied by institutional providers who monitor credit quality closely and respond to rates, so it can disappear fast in stress. Retail core deposits are usually insured and sticky. The other options are wrong because wholesale funding is typically uninsured, often short-term, and often collateralized.

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