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

Which characteristic distinguishes a dealer bank's balance sheet from that of a traditional commercial bank?

A dealer bank holds mostly marked-to-market trading assets financed heavily by short-term secured wholesale funding such as repo, with high leverage. A commercial bank instead holds loans funded mainly by deposits, giving the dealer far greater funding and rollover sensitivity.

  1. AAssets consist mainly of illiquid long-term loans held to maturity
  2. BFunding is predominantly insured retail deposits
  3. CAssets are mostly marked-to-market trading positions funded heavily by short-term secured financing, with high leverageCorrect
  4. DAccess to central bank lender-of-last-resort facilities is unlimited in all cases

Explanation

Dealer balance sheets are dominated by traded securities and derivatives positions valued at market and funded with repo and other wholesale sources, typically with high leverage. Traditional commercial banks hold loans funded by deposits. The other options describe commercial banking or overstate central bank support.

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