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

Which of the following is the best example of 'funding liquidity risk' as distinct from 'market liquidity risk' for a bank?

Failure to roll over maturing wholesale borrowings is funding liquidity risk, because the bank cannot raise cash to meet obligations when due. Inability to sell assets without heavy price loss is market liquidity risk, while loan default and fraud fall under credit and operational risk.

  1. AThe bank cannot sell a large block of corporate bonds without a sharp price fall because the market is thin
  2. BThe bank cannot roll over maturing wholesale borrowings and so struggles to meet its payment obligationsCorrect
  3. CThe bank's borrower defaults on a term loan instalment
  4. DThe bank suffers losses from a fraud in its branch network

Explanation

Funding liquidity risk is the inability to meet obligations as they fall due because funding cannot be raised or rolled over. Difficulty selling assets without a price impact is market liquidity risk. Loan default is credit risk and fraud is operational risk.

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