Skip to content

FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

A risk analyst at a dealer bank explains why the firm's balance sheet is more fragile than that of a traditional commercial bank. Which feature best describes the typical funding structure of a dealer bank?

Dealer banks typically fund large securities inventories with short-term secured and unsecured wholesale borrowing, such as repo. Because this funding must be rolled over often, it can disappear quickly in stress, unlike stable insured retail deposits at traditional commercial banks.

  1. AReliance mainly on insured retail deposits that are stable in stress
  2. BReliance heavily on short-term secured and unsecured wholesale funding to finance inventories of securitiesCorrect
  3. CFunding almost entirely through long-term equity capital
  4. DFunding through central bank standing deposits at all times

Explanation

Dealer banks hold large inventories of securities, often financed with short-term repo and other wholesale borrowing that must be rolled over frequently. Insured retail deposits are not the main source, so option A describes a commercial bank. This rollover dependence creates run-like vulnerability.

Did you get it right without looking?

One question tells you little. A timed set on The Failure Mechanics of Dealer Banks shows your real accuracy, how long you take and where you lose marks.

Practise The Failure Mechanics of Dealer BanksFree diagnostic mock

More The Failure Mechanics of Dealer Banks questions