FRM二级《操作及综合风险管理》At times large dealer banks have financed

At times large dealer banks have financed significant fractions of their assets using short-term (often overnight) repurchase agreements in which creditors held bank securities as collateral against default losses.

The table below shows the quarter-end financing of four broker-dealer financial instruments. All values are in USD billions.

  Bank A Bank B Bank C Bank D
Financial instruments
owned
 
1450
 
1500
 
1650
 
1750
Pledged as collateral 609 780 792 420
Not pledged 841 720 858 1330

In the event that repo creditors become equally nervous about each bank’s solvency, which bank is most vulnerable to a liquidity crisis?

A. Bank A

B. Bank B

C. Bank C

D. Bank D

Answer: B

Explanation:

  Bank A Bank B Bank C Bank D
Financial instruments
owned
 
1450
 
1500
 
1650
 
1750
Pledged as collateral 609 780 792 420
Not pledged 841 720 858 1330
Fraction Pledged 42% 52% 48% 24%

Repo creditors nervous about a bank’s solvency would likely not renew their positions, and that bank would be likely be unable to raise sufficient cash by other means on such short notice.

Since it has the largest dependence on short-term repo financing, Bank B is most vulnerable.

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