Skip to content

FRM Part II · FRM Exam Part II · Liquidity Risk Management

Which of the following is the best example of an event that mainly raises a bank's funding liquidity risk rather than its market liquidity risk?

Wholesale lenders refusing to roll over maturing borrowings is the funding liquidity event. It threatens the bank's ability to meet its cash obligations as they fall due. Wider spreads, lower volume and block-sale price impact describe market liquidity, meaning the cost and ease of trading assets.

  1. AShort-term wholesale lenders refuse to roll over maturing borrowingsCorrect
  2. BThe bid-ask spread on a government bond index widens sharply
  3. CTrading volume in a corporate bond falls by half
  4. DA large block sale moves the price of an equity holding

Explanation

Failure to roll over short-term funding directly threatens the bank's ability to meet payment obligations, which is funding liquidity risk. The other options describe trading conditions, such as wider spreads, lower volume and price impact, which are market liquidity features.

Did you get it right without looking?

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

Practise Liquidity Risk ManagementFree diagnostic mock

More Liquidity Risk Management questions