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

A treasurer is reviewing the bank's contingency funding plan and considers pre-positioning collateral at the central bank's discount window. Which is the strongest risk-management reason to do this?

Pre-positioning eligible collateral lets a bank turn otherwise illiquid assets into central bank funding quickly during stress, because legal, operational and valuation steps are already done. It does not remove stigma, replace liquid asset buffers, or create capital.

  1. AIt converts the bank's illiquid but eligible assets into liquidity quickly in stress, avoiding delays in collateral transfer and valuationCorrect
  2. BIt guarantees that borrowing will carry no stigma
  3. CIt removes the need to hold any high-quality liquid assets
  4. DIt lets the bank count the collateral as Tier 1 capital

Explanation

Pre-positioning collateral with documentation and valuation done in advance allows rapid access to central bank funding in stress. It does not eliminate stigma, replace HQLA buffers, or count as capital.

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