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FRM Part II · FRM Exam Part II · Monitoring Liquidity

In liquidity gap analysis, a bank finds that its cumulative gap is persistently negative in the 0-30 day buckets but strongly positive beyond one year. Which interpretation is most appropriate?

A negative short-term and positive long-term cumulative gap shows the bank funds long-dated assets with short-dated liabilities. That maturity mismatch creates rollover risk, because liabilities must be refinanced repeatedly, so close monitoring and a contingency funding plan are needed.

  1. AThe bank funds long-term assets with short-term liabilities, exposing it to rollover riskCorrect
  2. BThe bank has excess long-term funding relative to short-term needs and little rollover risk
  3. CThe bank is fully hedged against interest rate risk
  4. DThe bank has no need for a contingency funding plan

Explanation

Negative short-term gaps with positive long-term gaps indicate that near-term liabilities exceed near-term assets, while assets mature later. This maturity transformation requires continual rollover of funding, creating rollover risk. It says nothing about interest rate hedging.

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