FRM Part II · FRM Exam Part II · Liquidity Risk
Which feature most increases a bank's vulnerability to a funding run during a market-wide liquidity crisis?
Reliance on short-term wholesale funding to finance illiquid long-term assets is the greatest vulnerability. Lenders can refuse to roll over funding quickly, while the assets cannot be liquidated without losses, creating a destabilizing maturity mismatch.
- AHeavy reliance on short-term wholesale funding to finance illiquid long-term assetsCorrect
- BA large base of stable insured retail deposits
- CLong-dated term debt with staggered maturities
- DA diversified investor base with committed credit lines
Explanation
Short-term wholesale funding can be withdrawn or not rolled over quickly, while illiquid long-term assets cannot be sold quickly without losses. This maturity mismatch drives run risk. The other options are standard mitigants: stable deposits, staggered long-term debt, and diversified funding with committed lines.
Did you get it right without looking?
One question tells you little. A timed set on Liquidity Risk shows your real accuracy, how long you take and where you lose marks.
More Liquidity Risk questions
- A desk holds USD 20 million of a bond. Daily return volatility is 1.0% and the 99% z-value is 2.33. The desk can only liquidate the position…
- Which statement best describes the main limitation of the constant-spread and exogenous-spread approaches to liquidity-adjusted VaR when app…
- A bank runs a 30-day stress test. Opening liquid assets (after haircuts) are USD 900 million. Stress outflows: retail deposits of USD 2,000 …
- A risk manager at a trading firm notes that standard 99% one-day VaR for a large position in a thinly traded bond is computed from mid-marke…
- A trader holds a position in a bond quoted at a bid of 98.40 and an ask of 98.60. Using the mid-price as the reference, what is the proporti…
- A bank runs a reverse liquidity stress test. Which describes its objective most accurately?