Skip to content

FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

Which of the following best describes the role of a financial intermediary such as a bank in transforming risk between savers and borrowers?

A bank diversifies across many borrowers and transforms maturity and liquidity for savers, but it retains residual credit, liquidity and interest rate risks on its balance sheet. Pooling reduces idiosyncratic risk without eliminating it, and the bank is not a pure agent.

  1. AIt eliminates all credit risk by pooling deposits
  2. BIt transfers all risk of borrower default to depositors with no retained exposure
  3. CIt diversifies across many borrowers and transforms maturity and liquidity, bearing the residual risksCorrect
  4. DIt acts only as an agent and never takes balance sheet risk

Explanation

Banks pool funds, diversify across many borrowers, and offer liquid deposits while making illiquid longer loans. Diversification reduces but does not eliminate credit risk, and the bank keeps residual credit, liquidity and interest rate risk on its balance sheet.

Did you get it right without looking?

One question tells you little. A timed set on The Building Blocks of Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise The Building Blocks of Risk ManagementFree diagnostic mock

More The Building Blocks of Risk Management questions