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CMA Final · Risk Management in Banking and Insurance · Liquidity Risk Management

Which of the following is a feature of liquidity risk arising from a bank's funding structure, as distinguished from market liquidity risk?

Funding liquidity risk is the inability to meet obligations as they fall due without unacceptable cost or loss because funding sources dry up or cannot be rolled over. It differs from market liquidity risk, which concerns selling assets in thin markets, and from interest rate or credit risk.

  1. AInability to sell an asset at its fair price because the market is thin
  2. BInability to meet obligations as they fall due without incurring unacceptable cost or loss, because funding sources dry upCorrect
  3. CLoss in value of a bond portfolio caused by a rise in interest rates
  4. DLoss arising from a counterparty failing to repay a loan

Explanation

Funding liquidity risk is the risk of being unable to meet payment obligations when due because funding cannot be rolled over or raised at acceptable cost. The thin-market option describes market liquidity risk, the rate-rise option is interest rate risk, and the last is credit risk.

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