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

A treasurer compares two ways to raise USD 100 million for three years: (1) a 3-year brokered CD with no early withdrawal and (2) a 3-year senior bond. Both have similar yields. Which is the strongest reason a bank might prefer the senior bond for liquidity risk management?

The senior bond is attractive because it draws on a diversified capital-markets investor base and avoids the broker concentration and regulatory restrictions that can limit brokered deposits when a bank weakens. It is not automatically cheaper and still requires contingency funding planning.

  1. ABonds are always cheaper than brokered CDs because they are unsecured
  2. BBonds eliminate the need for any contingency funding plan
  3. CBonds do not count as liabilities for liquidity coverage purposes
  4. DBondholders are a diversified investor base, and the bond is not subject to the broker-related regulatory limits and the funding concentration risk that can apply to brokered depositsCorrect

Explanation

Senior bonds access capital markets investors with fixed maturity and are not subject to brokered deposit restrictions that can apply when a bank weakens. Brokered CDs may be concentrated through a few brokers and subject to restrictions. Bonds are not always cheaper, still need contingency planning, and are liabilities for liquidity metrics.

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