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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

Relative to overnight federal funds borrowing, which feature of repo funding makes it more vulnerable to a sudden loss of funding during a market stress episode in which collateral values are uncertain?

Repo funding is vulnerable because lenders can increase haircuts and margin calls when collateral values become uncertain, so the bank raises less cash against the same securities. Repo is secured and typically short-term, requiring frequent rollover, and its rates are market-determined.

  1. AHaircuts and margin calls can rise sharply, reducing the cash raised against the same collateralCorrect
  2. BRepo transactions are always unsecured, so lenders withdraw at the first sign of stress
  3. CRepo borrowing is limited to long maturities, preventing rollover
  4. DRepo rates are fixed by the central bank and cannot adjust to risk

Explanation

Repo is secured, so the cash available depends on collateral value and the haircut, which lenders can raise in stress, shrinking funding. It is not unsecured, is mostly short-dated and needs frequent rollover, and rates are market determined.

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