Skip to content

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

A regional bank is deciding whether to fund asset growth with brokered certificates of deposit (CDs) rather than local retail deposits. Which feature of brokered deposits is the most important liquidity risk consideration for the bank's treasurer?

The key risk is that brokered deposits are rate-sensitive, non-relationship funds that can run off or become unavailable when the bank weakens or prices below market, and regulation may restrict them for poorly capitalized banks. Fixed maturity and insurance do not remove this rollover and funding availability risk.

  1. AThey are rate-sensitive funds that can be lost quickly if the bank's financial condition weakens or its pricing falls below market, and regulators may restrict access when capital is lowCorrect
  2. BThey carry no interest rate risk because the maturity is fixed at issuance
  3. CThey are insured retail funds, so they are always behaviorally stable and never require contingency planning
  4. DThey are exempt from concentration limits because a broker spreads them across many depositors

Explanation

Brokered deposits are sourced through intermediaries and chase yield, so they are highly rate-sensitive and not relationship-based. Regulatory limits on weaker institutions can cut off the source just when it is needed. Fixed maturity does not remove interest rate or rollover risk, and insured status does not make them behaviorally stable.

Did you get it right without looking?

One question tells you little. A timed set on Managing Nondeposit Liabilities shows your real accuracy, how long you take and where you lose marks.

Practise Managing Nondeposit LiabilitiesFree diagnostic mock

More Managing Nondeposit Liabilities questions