FRM Part II · FRM Exam Part II · Liquidity Risk Management
Which action best reduces a bank's funding concentration risk as part of its liquidity risk management?
Diversifying funding across counterparties, instruments, currencies and maturities, with limits on each, best reduces concentration risk. The alternatives either deepen reliance on one source or shorten maturities, increasing rollover risk.
- ADiversifying across counterparties, instruments, currencies and maturities, with limits on eachCorrect
- BRaising all funding from the single largest and cheapest wholesale lender
- CShortening the maturity of all liabilities to reduce interest cost
- DHolding all liquidity buffer assets in one highly rated sovereign bond
Explanation
Concentration limits across providers, products, currencies and tenors reduce dependence on any single source. The other options increase concentration or rollover risk.
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