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

Which of the following is a distinctive reason a dealer bank's failure may be faster than that of a traditional commercial bank?

Dealer banks fund themselves with runnable wholesale liabilities rather than insured deposits, and historically lacked commercial-bank-style central bank backstops. This lets counterparties withdraw funding and collateral very quickly, so a dealer's failure can unfold far faster than a deposit-funded bank's.

  1. ADealer banks lack stable insured deposit funding and the lender-of-last-resort access historically available to commercial banksCorrect
  2. BDealer banks hold only illiquid loans that cannot be sold
  3. CDealer banks have longer-maturity liabilities than assets
  4. DDealer banks are not exposed to counterparty runs

Explanation

Dealer banks rely on runnable wholesale funding rather than insured deposits and, before the crisis, lacked the safety nets available to commercial banks. Their assets are often liquid securities, not illiquid loans, and their liabilities are typically short. They are very exposed to counterparty runs.

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