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

A treasurer is deciding how to treat the central bank discount window in the bank's contingency funding plan. Which approach is most consistent with sound practice?

The sound approach is to pre-position eligible collateral and test operational access to the central bank facility, treating it as an emergency backstop rather than a routine funding source. Collateral must meet eligibility rules and haircuts, so readiness matters more than assumed availability.

  1. ACount discount window capacity as a primary, routine source of funding in normal conditions to lower costs
  2. BPre-position eligible collateral and test operational access, treating the facility as a backstop rather than a core funding sourceCorrect
  3. CAvoid any testing, since test borrowing would signal weakness to the market
  4. DAssume the facility will lend against any asset at par value during stress

Explanation

Sound practice is to pre-position collateral, understand haircuts and operational procedures, and test access, while treating central bank facilities as a backstop. Relying on them routinely, avoiding testing, or assuming par lending against any asset are all poor practice.

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