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FRM Part II · FRM Exam Part II · Contingency Funding Planning

During the 2007-2009 crisis, several institutions that funded long-term assets with short-term wholesale borrowings found they could not roll over funding. Which CFP weakness does this experience most directly illustrate?

The experience shows weakness in stress scenarios that assumed wholesale funding and markets would stay open. Crises combined firm-specific and market-wide stress, closing secured and unsecured funding together, so plans must assume funding sources may disappear at the same time and cannot rely on rollover.

  1. AStress scenarios that assumed market-wide funding access would remain available and ignored the combination of institution-specific and market-wide stressCorrect
  2. BExcessive holdings of high-quality liquid assets relative to net outflows
  3. COverly conservative haircuts applied to pledged collateral
  4. DToo many early warning indicators being monitored

Explanation

The crisis showed that firm-specific and market-wide stress occurred together, and secured and unsecured funding markets closed simultaneously. CFPs that assumed assets could be sold or funding rolled over failed. Excess liquid assets, conservative haircuts, and monitoring too many indicators were not the cause of failure.

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