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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A risk manager at a global bank is reviewing how a sharp rise in geopolitical risk, such as an escalation of regional conflict, can affect the bank's balance sheet. Which of the following is the most direct channel through which such an event typically transmits to bank funding?

The most direct channel is funding. Higher geopolitical risk raises uncertainty and risk premia, so investors demand more compensation, increasing wholesale funding costs and limiting market access for banks. Regulatory design features, goodwill accounting and reserve requirements are not transmission channels of such a shock.

  1. AHigher wholesale funding costs and reduced market access as investors demand greater compensation for uncertaintyCorrect
  2. BA mechanical rise in the bank's risk-weighted asset density due to Basel III output floor changes
  3. CA decline in the bank's reported accounting goodwill under IFRS
  4. DA reduction in the bank's statutory reserve requirement

Explanation

Heightened geopolitical risk raises uncertainty and risk premia, which lifts wholesale funding spreads and can curtail market access. The other options are unrelated to a geopolitical shock: the output floor is a regulatory design feature, goodwill is not directly affected, and reserve requirements are set by central banks rather than reacting to the shock.

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