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

A regional bank relies on wholesale funding and wants to reduce the chance that a single event disrupts its ability to roll over liabilities. Which funding strategy best addresses this concern?

Diversifying funding sources across counterparties, instruments, currencies and maturities is the best approach, because no single market disruption or provider withdrawal can then remove a large share of funding. Concentration and short-term funding of long assets increase rollover risk rather than reduce it.

  1. AConcentrate funding with a few large, long-standing counterparties to strengthen relationships
  2. BDiversify funding by counterparty, instrument type, currency and maturityCorrect
  3. CFund all long-term assets with overnight borrowing to minimize interest cost
  4. DRely mainly on a single secured funding market because collateral reduces all risk

Explanation

Diversification across counterparties, instruments, currencies and maturities limits the damage if one market or provider withdraws. Concentration with a few providers creates a single point of failure. Overnight funding of long-term assets raises rollover risk.

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