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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A regional bank relies on three wholesale funding providers. Over the past year, 70% of its wholesale funding came from a single money market fund complex. Which risk is most directly heightened by this concentration?

Funding concentration risk is most directly heightened. When one money market fund complex supplies most wholesale funding, its withdrawal or refusal to roll over would remove a large share of liquidity at once, so diversifying across providers reduces this exposure.

  1. ABasis risk between funding and lending rates
  2. BFunding concentration risk, because loss of one provider could sharply reduce available fundingCorrect
  3. CCredit risk on the bank's loan portfolio
  4. DModel risk in the bank's VaR estimation

Explanation

Reliance on one provider for most wholesale funding means a withdrawal or refusal to roll would remove a large share of funding at once. Basis, credit and model risks are not the direct consequence of provider concentration.

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