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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A treasurer wants to improve the resilience of the bank's liability structure. Which action best strengthens funding diversification?

Spreading funding across retail deposits, secured and unsecured wholesale markets, and different maturities and currencies best strengthens diversification. Stress in any one market then affects only part of the funding base, whereas concentrating on one investor, shortening tenor, or relying on one counterparty class keeps vulnerability high.

  1. AShifting all short-term wholesale funding to a single longer-dated bond investor
  2. BSpreading funding across retail deposits, secured and unsecured wholesale, and varied maturities and currenciesCorrect
  3. CReplacing term funding with overnight funding to lower cost
  4. DBorrowing only from counterparties with the highest credit ratings

Explanation

Diversification means varying sources, instruments, maturities, currencies and counterparties so that stress in one market does not cut off all funding. Options A and D keep concentration, and C increases rollover risk by shortening tenor.

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