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Answer: It is the possibility that a bank could find itself unable to settle obligations as soon as they are due.
## Explanation **Funding liquidity risk** is indeed the possibility that a bank or any financial institution could find itself unable to settle obligations as soon as they are due. This risk arises when a company is unable to meet its short-term financial obligations due to insufficient cash, cash equivalents, or limited access to funding sources. This inability to settle obligations on time can have severe consequences, including: - Reputational damage - Loss of confidence from customers and investors - Increased borrowing costs - In extreme cases, insolvency or bankruptcy Therefore, managing funding liquidity risk is crucial for the survival and success of any financial institution. ### Why other options are incorrect: **Choice B** describes **interest rate risk**, not funding liquidity risk. Interest rate risk refers to the potential for investment losses due to a change in interest rates, not the inability to meet obligations as they come due. **Choice C** relates to liquidity management strategies but does not define funding liquidity risk accurately. It describes the objective of liquidity management rather than the risk itself. **Choice D** describes **model risk**, which is the risk of loss resulting from the use of insufficiently accurate models to make decisions when valuing financial securities or making investment decisions.
Author: Tanishq Prabhu
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During a company's annual general meeting, a shareholder asks the Chief Risk Officer to elaborate on what she meant by funding liquidity risk. Which of the following definitions given by the Chief Risk Officer is correct?
A
It is the possibility that a bank could find itself unable to settle obligations as soon as they are due.
B
It is the danger that a change in rates will cause the value of assets to decline and that of liabilities to increase.
C
It is the aim to ensure that banks have liquidity and funding strategies that will survive system-wide stress scenarios.
D
It is the risk of loss resulting from the use of insufficiently accurate models to make decisions when valuing financial securities.
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