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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

During a geopolitical shock, a bank that relies heavily on short-term wholesale dollar funding sees counterparties cut credit lines and demand higher haircuts on repo collateral. Which risk channel is primarily at work?

This is the funding and liquidity channel. Counterparties cutting credit lines and raising repo haircuts increases rollover risk and collateral demands for a bank dependent on short-term wholesale dollar funding, which can force asset sales and amplify stress even if credit quality has not yet deteriorated.

  1. AFunding and liquidity channel, with rollover risk and rising margin demandsCorrect
  2. BPure model risk from regression misspecification
  3. COperational risk from internal fraud
  4. DReputational risk limited to retail depositors

Explanation

Reduced credit lines and larger haircuts on short-term wholesale funding raise rollover risk and liquidity needs. This is the funding and liquidity channel. The other options do not describe withdrawal of wholesale funding or higher collateral demands.

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