Skip to content

FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

In Duffie's analysis of the failure of dealer banks, which feature of Bear Stearns' funding most directly explained how it moved from apparent health to failure within days in March 2008?

Bear Stearns failed because of a run by repo lenders and prime brokerage clients. They withdrew cash and refused to roll secured funding, quickly exhausting its liquidity pool even though its regulatory capital appeared adequate shortly before the collapse.

  1. AA run by prime brokerage clients and repo lenders who withdrew cash and secured funding, rapidly depleting its liquidity poolCorrect
  2. BA sudden regulatory ban on its holding of mortgage securities, forcing immediate sales
  3. CA mandatory call of its long-term subordinated debt by bondholders
  4. DA large cash margin call from exchange-traded futures positions

Explanation

Bear Stearns relied heavily on short-term secured funding and client balances. When confidence fell, repo lenders refused to roll and prime brokerage clients moved cash away, draining its liquidity pool within days. The other options do not describe the mechanism of the run.

Did you get it right without looking?

One question tells you little. A timed set on The Failure Mechanics of Dealer Banks shows your real accuracy, how long you take and where you lose marks.

Practise The Failure Mechanics of Dealer BanksFree diagnostic mock

More The Failure Mechanics of Dealer Banks questions