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FRM Part I · FRM Exam Part I · Banks

Which of the following best describes the main liquidity risk created when a bank funds long-term fixed-rate loans mainly with short-term wholesale deposits?

The main danger is funding liquidity risk: short-term wholesale funding must be repeatedly rolled over, and in stress lenders may refuse, forcing the bank to sell long-term assets at losses or borrow expensively. This maturity mismatch is the core of liquidity vulnerability.

  1. AFunding liquidity risk from rollover difficulty if wholesale lenders withdraw during stressCorrect
  2. BCredit risk because the loans' coupons are fixed
  3. COperational risk arising from mismatched settlement systems
  4. DBasis risk between LIBOR and the central bank rate only

Explanation

Maturity transformation relies on rolling over short-term funding. If wholesale lenders refuse to roll over, the bank must sell assets at a discount or find costly funding. The other options describe different risks that are not the principal liquidity concern.

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