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

A treasurer compares two funding sources of USD 200 million each: (A) unsecured 3-month commercial paper and (B) 3-month repo backed by Treasury securities with a 2% haircut. In a stress event where the bank's credit rating is downgraded, which assessment is most accurate?

Repo backed by Treasuries is generally more resilient than unsecured commercial paper, which investors may refuse to roll after a downgrade. However, repo is not immune because haircuts can rise at rollover and the bank needs enough eligible collateral, so both carry rollover risk.

  1. AThe repo is likely to be more resilient, but the commercial paper market may close entirely to the bank, and the repo still exposes the bank to haircut increases and collateral availabilityCorrect
  2. BBoth are equally resilient because both mature in three months
  3. CThe commercial paper is more resilient because it is unsecured and so unaffected by collateral values
  4. DThe repo is entirely immune to stress because the haircut is fixed by contract for life

Explanation

Secured funding with high-quality collateral typically holds up better than unsecured paper, which can become unavailable after a downgrade. But repo is not risk-free: haircuts can rise and collateral must be available. The other statements ignore these differences or wrongly claim fixed haircuts.

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