FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities
Compared with unsecured wholesale borrowing, which risk is increased when a bank relies heavily on secured funding such as FHLB advances?
Heavy reliance on secured funding increases asset encumbrance, leaving fewer unencumbered assets available for future funding or stress needs. Unsecured creditors also become effectively subordinated, which can make them more likely to withdraw or demand higher spreads when conditions deteriorate.
- AReduced ability to meet future needs because assets become encumbered and unavailable to other creditors or later fundingCorrect
- BHigher exposure to unsecured counterparties' credit risk
- CImmediate elimination of interest rate risk
- DGreater reliance on short-term retail deposits
Explanation
Heavy secured funding encumbers assets, leaving fewer unencumbered assets for stress and subordinating unsecured creditors, who may then demand higher spreads or withdraw. It does not remove interest rate risk or raise retail deposit reliance.
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