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

A regional bank's treasurer is comparing brokered certificates of deposit with local retail time deposits as a funding source. Which statement best describes a key liquidity risk feature of brokered deposits?

Brokered deposits are rate-sensitive, non-relationship funds. The bank must keep paying competitive yields to attract and retain them, and access may shrink or disappear if its financial condition weakens, so they carry meaningful rollover and availability risk despite fixed terms.

  1. AThey are insensitive to rate changes because brokers lock in the depositor for the full term
  2. BThey are rate-sensitive funds whose availability depends on the bank paying competitive yields, and they may become unavailable if the bank's condition weakensCorrect
  3. CThey carry no regulatory scrutiny because the broker bears the credit risk
  4. DThey always have longer maturities than retail time deposits, which removes rollover risk

Explanation

Brokered deposits are gathered through intermediaries who shop for the highest yield, so the funds are rate-sensitive and non-relationship based. Access can be restricted or lost when a bank's capital or condition deteriorates. The option claiming insensitivity to rates is wrong because depositors are driven by yield.

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