FRM Part II · FRM Exam Part II · Liquidity and Leverage
Which funding source would a liquidity risk manager generally view as the most prone to sudden withdrawal during a market-wide stress?
Uninsured short-term wholesale funding, such as commercial paper, is most prone to sudden withdrawal because credit-sensitive lenders can simply refuse to roll it at maturity, whereas insured retail deposits, long-term debt and equity are far more stable.
- AInsured retail deposits from stable operating accounts
- BLong-term subordinated debt with ten years to maturity
- CUninsured wholesale short-term funding such as commercial paperCorrect
- DCommon equity raised in the prior year
Explanation
Uninsured short-term wholesale funding is provided by sophisticated, credit-sensitive lenders who can decline to roll at maturity, so it runs quickly. Insured retail deposits, long-term debt and equity are much stickier or have no near-term maturity.
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