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

A regional bank relies heavily on large uninsured wholesale deposits and federal funds purchased from a handful of counterparties. Which funding-management action most directly reduces the bank's funding concentration risk?

Diversifying funding across counterparties, instruments, maturities and markets, and capping reliance on any single source, most directly reduces concentration risk. It limits the damage if one provider withdraws. Shortening maturities or leaning on overnight funds raises rollover risk instead.

  1. AShortening the maturity of all wholesale borrowings to overnight to lower interest cost
  2. BDiversifying funding across more counterparties, instruments, maturities and markets, with internal limits on any single sourceCorrect
  3. CRaising the interest rate offered to the largest providers so they keep their balances
  4. DReplacing term borrowings with additional overnight federal funds purchased

Explanation

Concentration risk arises when a few providers, instruments or markets dominate funding, so withdrawal by one can cause a shortfall. Spreading funding across sources, tenors and markets and setting limits reduces this. Shortening maturities or relying more on overnight funds increases rollover risk, and paying the largest providers more deepens the concentration.

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