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

A risk manager reviews the Lehman Brothers failure in September 2008. Which statement best describes the role of the 'run' by clearing and settlement counterparties and prime brokerage clients?

Counterparties and prime brokerage clients demanded more collateral and withdrew balances. That simultaneously raised Lehman's liquidity needs and depleted its pool of unencumbered assets, accelerating the failure. Their actions were a run on the dealer, not a source of stable funding.

  1. AThey demanded additional collateral and reduced exposure, increasing Lehman's liquidity needs while its available liquidity pool shrankCorrect
  2. BThey increased unsecured lending to Lehman because of its strong capital ratio
  3. CThey had no effect because Lehman's liquidity came entirely from central bank facilities
  4. DThey converted their balances into long-term equity in Lehman

Explanation

As doubts grew, clearing banks and other counterparties demanded more collateral, and prime brokerage clients pulled balances and positions. This raised Lehman's liquidity needs at the same time its unencumbered assets were being consumed. The other options contradict the facts of the run.

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