medium · FRM Part 2 Liquidity & Treasury Risk
A bank observes that its 'Basis Risk' in the banking book is increasing.
Which of the following scenarios best illustrates this risk subspecies?
- Mortgage borrowers refinance their loans early as interest rates fall, prepaying principal.
- A parallel shift in the entire yield curve reduces the economic value of equity for the bank.
- Assets linked to SOFR and liabilities linked to administered retail deposit rates reprice differently.
- The bank funds long-dated ten-year fixed-rate assets using short-term overnight deposit funding sources.
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