Introduction
A bank needs funding every day to:
meet deposit withdrawals;
honour payment obligations;
finance loans;
settle market transactions;
meet collateral calls; and
support business growth.
The availability of funding today does not guarantee that the same funding will remain available tomorrow.
A bank may appear liquid but become vulnerable because:
too much funding comes from a few large depositors;
liabilities mature much earlier than assets;
the bank depends excessively on wholesale markets;
funding comes mainly from one instrument or currency; or
funding sources disappear during stress.
A sound funding strategy therefore focuses not only on the amount and cost of funds but also on:
stability;
diversification;
maturity;
market access;
concentration; and
availability under stress.
Basel's current liquidity-risk framework, consolidated in January 2026, requires banks to maintain a funding strategy that provides effective diversification across the sources and tenor of funding. It specifically expects consideration of counterparties, secured versus unsecured funding, instruments, currencies and geographical markets.
RBI similarly requires banks to avoid over-reliance on a single funding source and to diversify funding through limits relating to areas such as tenor, counterparty, secured or unsecured funding, instrument, currency and geographical market.
For CAIIB case studies, remember:
A good funding strategy asks not only “Can we raise funds?” but also “Will those funds remain available at the required time and reasonable cost during stress?”
Learning Objectives
After studying this topic, you should be able to:
explain a bank's funding strategy;
understand the need for funding diversification;
identify major forms of funding concentration;
distinguish retail and wholesale funding characteristics;
understand maturity and rollover concentration;
explain funding limits and escalation;
understand the importance of market access;
identify currency and geographical concentration;
assess secured versus unsecured funding dependence; and
solve CAIIB liquidity-funding cases logically.
What Is a Funding Strategy?
A funding strategy is the bank's planned approach for obtaining funds required to meet:
normal operating needs;
expected asset growth;
unexpected cash-flow requirements; and
stressed liquidity conditions.
It should be consistent with:
business strategy;
liquidity-risk appetite;
balance-sheet structure;
asset growth;
market conditions; and
contingency arrangements.
A sound funding strategy should consider three important dimensions:
Source
Where will funding come from?
Examples:
retail deposits;
corporate deposits;
interbank borrowing;
debt securities;
secured borrowing; or
other market funding.
Tenor
For how long will the funds remain available?
Examples:
overnight;
one month;
one year; or
several years.
Stability
How likely is the funding to remain available under stress?
The lowest-cost source is therefore not necessarily the best source.
Why Funding Diversification Is Important
Diversification reduces dependence on one source of funds.
A bank should avoid a situation where withdrawal or closure of one funding channel creates a major liquidity problem.
Basel requires diversification across short-, medium- and long-term funding and expects banks to consider limits by:
counterparty;
secured versus unsecured funding;
instrument type;
currency;
geographical market; and
other relevant funding sources.
Diversification therefore has several dimensions.
Counterparty Diversification
The bank should not depend excessively on:
one depositor;
one corporate group;
one institutional investor; or
a small group of funding counterparties.
Instrument Diversification
Funding should not depend excessively on one instrument.
Examples of different sources may include:
savings and current deposits;
term deposits;
wholesale deposits;
certificates or debt instruments;
secured borrowing; and
other market funding.
Tenor Diversification
If most liabilities mature within a very short period, the bank faces heavy refinancing risk.
A more diversified maturity profile reduces the need to refinance a large amount at the same time.
Currency Diversification
A bank active in foreign currencies needs adequate access to funding in each material currency.
Basel warns that banks may not always be able to swap liquidity easily from one currency into another during stress.
Market Diversification
A bank dependent only on one market can suffer if that particular market becomes disrupted.
Diversified access may include different:
investor groups;
geographical markets; and
secured or unsecured channels.
Funding Concentration
Funding concentration exists when a significant portion of funding depends on a limited number of similar sources.
Concentration may arise by:
depositor;
counterparty;
product;
instrument;
maturity;
market;
currency; or
geography.
Basel's liquidity-monitoring framework specifically monitors significant wholesale funding concentrations by:
individual counterparty;
product or instrument; and
significant currency.
The main concern is simple:
Would withdrawal or non-renewal of this source materially affect the bank's liquidity?
Large Depositor Concentration
Suppose a bank has ₹10,000 crore of deposits.
Three large corporate customers provide ₹2,000 crore.
The bank may currently have comfortable liquidity.
However, if those three depositors act similarly during stress, the bank could lose a significant part of its funding very quickly.
The issue is therefore not merely:
Are the deposits currently available?
The correct questions are:
How concentrated are they?
When do they mature?
How sensitive are depositors to interest rates?
Could all depositors withdraw together?
Can the bank replace the funds quickly?
Retail vs Wholesale Funding
Retail deposits are often considered comparatively stable because they come from a broad number of customers.
Wholesale funding generally comes from:
companies;
financial institutions;
money markets; or
institutional investors.
Wholesale funding can be useful and efficient.
However, Basel notes that wholesale funding tends to be more volatile than retail funding and expects banks relying heavily on it to ensure sufficient diversification and maintain relatively stronger access to unencumbered liquid assets.
The correct conclusion is not:
Wholesale funding is bad.
Rather:
Excessive or concentrated dependence on volatile wholesale funding increases liquidity risk.
Rollover Risk
Rollover risk arises when existing funding matures and must be replaced with new funding.
Suppose a bank finances a five-year loan using one-month borrowing.
Every month, the bank must refinance.
If funding markets remain normal, refinancing may be easy.
During stress:
lenders may refuse to renew;
maturity offered may shorten;
funding cost may rise; or
the market may close.
Therefore:
Short-term funding of long-term assets creates refinancing dependence.
This is why diversification of tenor is as important as diversification of source.
Funding Limits
Funding limits help convert the bank's risk appetite into measurable controls.
Basel requires banks to establish limits for controlling liquidity exposures and vulnerabilities and to regularly review those limits and their escalation procedures.
Limits may address:
cumulative cash-flow mismatches;
funding from one counterparty;
concentration in large depositors;
short-term wholesale funding;
instrument concentration;
secured or unsecured borrowing;
currency funding;
maturity concentration; and
other bank-specific vulnerabilities.
There is no single universal concentration percentage that is appropriate for every form of funding.
Limits should reflect the bank's:
size;
funding model;
liquidity risk appetite;
business complexity;
market access; and
stress capacity.
Limit Monitoring and Escalation
Limits are useful only when breaches lead to action.
A basic process is:
Set Limit → Monitor → Detect Breach → Escalate → Correct → Reassess
When a limit is breached, management should examine:
reason for the breach;
duration;
size;
liquidity impact;
market conditions;
corrective action; and
whether senior or Board-level escalation is necessary.
The wrong approach is:
“The limit was breached, so increase the limit.”
A limit should be changed only through proper governance where the bank genuinely decides to change its approved risk position.
Secured vs Unsecured Funding
Unsecured Funding
The lender provides funds based mainly on the bank's creditworthiness.
During stress, unsecured funding can become difficult or expensive because counterparties may lose confidence.
Secured Funding
The bank provides collateral in return for funding.
Secured funding can remain available when unsecured markets become difficult, but it creates other considerations:
collateral availability;
collateral valuation;
haircuts;
encumbrance; and
operational capacity to mobilise assets.
Therefore, a bank should not assume:
Secured funding will always remain unlimited during stress.
A funding strategy should consider both types.
Asset Encumbrance and Funding Capacity
An asset pledged as collateral becomes encumbered.
If a large proportion of good-quality assets is already pledged, the bank may have limited capacity to raise additional secured funds during stress.
Therefore, management should monitor:
total collateral;
collateral already pledged;
unencumbered assets;
eligible assets;
potential haircut changes; and
ability to mobilise collateral rapidly.
Basel requires banks to maintain a cushion of high-quality, unencumbered liquid assets and to assess their capacity to monetise assets when necessary.
Market Access
Funding diversification is ineffective if the bank has no real access to the market.
Basel identifies active management of market access as essential for funding diversity. Banks should maintain relationships with funding providers and regularly assess how quickly funds can actually be raised.
A bank should therefore maintain:
relationships with depositors;
access to relevant funding markets;
operational readiness;
documentation;
eligible collateral; and
practical ability to transact.
An unused funding source that exists only in a presentation may provide little help during a crisis.
Funding Strategy and Stress
Funding assumptions that appear reasonable during normal conditions may fail under stress.
Examples:
Normal Assumption
Corporate deposits will roll over.
Stress Outcome
Corporate treasurers withdraw funds to protect their own liquidity.
Normal Assumption
The bank can borrow unsecured in the market.
Stress Outcome
Counterparties reduce limits because of negative news.
Normal Assumption
Foreign-currency funding can be replaced through swaps.
Stress Outcome
Swap-market liquidity deteriorates.
Therefore, funding strategies should be tested against:
bank-specific stress;
market-wide stress; and
combined stress.
Basel's supervisory principles require funding analysis under alternative scenarios and regular review of concentration limits.
Case Study 1: Dependence on Three Corporate Depositors
A bank has strong reported liquidity.
However, 25% of its deposits come from three large corporate groups.
All three deposits mature within the same month.
The business head argues:
“There is no concern because these customers have maintained deposits with us for five years.”
Analysis
Historical stability is useful information but does not eliminate concentration risk.
The bank should assess:
possibility of simultaneous withdrawal;
maturity concentration;
depositor behaviour during stress;
alternative funding capacity;
market access; and
liquidity available if the deposits are not renewed.
Appropriate Actions
Possible measures include:
diversify the depositor base;
stagger maturity dates;
increase stable funding;
maintain additional liquid resources; and
set or tighten concentration limits.
CAIIB Lesson
A long relationship does not remove large-depositor concentration risk.
Case Study 2: Cheap Overnight Funding
A treasury desk discovers that overnight market borrowing is much cheaper than three-year funding.
Management proposes using overnight borrowing to finance long-term asset growth.
Analysis
The strategy reduces current funding cost but creates:
maturity mismatch;
rollover risk;
dependence on continuous market access; and
vulnerability to interest-rate and liquidity stress.
If the market closes tomorrow, the bank still owns the long-term assets but must replace the matured borrowing.
CAIIB Lesson
Cheapest funding can create the highest refinancing dependence.
Case Study 3: Wholesale Funding from Many Counterparties
A bank obtains wholesale funding from 50 different institutions.
Management concludes that funding is fully diversified.
However, 90% of these funds are:
overnight;
unsecured; and
sourced from the same money market.
Analysis
Counterparty diversification exists, but other concentrations remain.
The bank is concentrated by:
tenor;
instrument;
market; and
unsecured funding type.
True diversification must consider several dimensions simultaneously.
CAIIB Lesson
Many counterparties do not automatically mean a fully diversified funding structure.
Case Study 4: Foreign-Currency Funding
A bank has large US-dollar assets funded mainly by short-term dollar borrowing.
It also has substantial surplus rupee deposits.
Management assumes that rupee liquidity can always be swapped into dollars if required.
Analysis
The bank still faces foreign-currency liquidity risk.
During market stress:
swap markets may become expensive;
counterparties may reduce limits; or
dollar funding may become scarce.
Basel specifically expects banks active in multiple currencies to maintain access to diverse liquidity sources because currencies cannot always be exchanged easily during stress.
CAIIB Lesson
Overall bank liquidity does not guarantee adequate liquidity in each material currency.
Case Study 5: Secured Funding Strategy
A bank plans to rely heavily on secured borrowing during stress.
It holds substantial securities, but most of its highest-quality assets are already pledged.
Analysis
The key question is not the total value of securities.
The bank should determine:
which assets remain unencumbered;
which are acceptable to funding counterparties;
how quickly they can be mobilised;
likely stressed haircuts; and
how much cash can actually be raised.
CAIIB Lesson
Total assets are not the same as usable funding capacity.
Case Study 6: Limit Breach Before Quarter-End
A bank's policy limits funding from a single institutional depositor.
A new large deposit causes the limit to be exceeded shortly before quarter-end.
Because the deposit improves reported liquidity, management suggests ignoring the breach.
Analysis
The deposit increases available cash but also increases funding concentration.
The bank should:
report the breach;
assess its materiality;
follow approved escalation;
determine whether corrective action is required; and
avoid treating increased liquidity as justification for violating concentration controls.
CAIIB Lesson
More funding can sometimes increase liquidity risk if it creates excessive concentration.
Case Study 7: Funding Source Available Only in Normal Markets
A bank's liquidity plan states that it can issue market debt whenever required.
During a stress test, investors are assumed to purchase the debt at the normal market spread.
Analysis
The assumption may be unrealistic.
During stress:
issuance cost may rise;
maturity available may shorten;
investors may reduce exposure; or
the bank may lose market access entirely.
Basel requires banks to regularly gauge their actual capacity to raise funds and monitor factors affecting that capacity.
CAIIB Lesson
Funding capacity should be tested, not merely assumed.
Funding Concentration and Contingency Planning
A bank's Contingency Funding Plan should consider what happens if important funding sources disappear.
Examples include:
major depositor withdrawals;
unsecured market closure;
secured funding haircuts rising;
foreign-currency funding disruption; or
debt-market access being lost.
Alternative actions might include:
drawing available committed facilities;
mobilising unencumbered assets;
changing asset growth;
selling liquid assets;
increasing stable deposits; or
using other approved contingency actions.
Contingency funding therefore provides a backup to the normal funding strategy.
Practical Case-Study Framework
For CAIIB cases, use S–T–A–B–L–E.
S — Source
Where is funding coming from?
T — Tenor
When does it mature?
A — Availability
Will it remain available under stress?
B — Breadth
Is funding diversified across counterparties, instruments, currencies and markets?
L — Limits
Are concentration and liquidity limits being respected?
E — Emergency Alternative
What is the replacement source if normal funding disappears?
This approach helps identify weaknesses quickly.
CAIIB Exam Focus
Remember these high-value concepts:
A funding strategy should support expected and unexpected cash requirements.
Diversification should cover both source and tenor.
Funding concentration can occur by counterparty, instrument, tenor, currency or market.
Over-reliance on one funding source should be avoided.
Wholesale funding can be more volatile than broad retail funding.
Wholesale funding is not inherently improper; excessive dependence is the concern.
Short-term funding creates rollover risk when used to finance longer-term assets.
Many funding counterparties do not guarantee diversification if all funding comes from the same market or maturity.
Foreign-currency liquidity should be assessed separately where material.
Secured and unsecured funding have different vulnerabilities.
Encumbered assets may not be available for additional funding.
Market access should be maintained and periodically tested.
Funding-provider relationships are important.
Limits translate liquidity-risk appetite into measurable controls.
Concentration limits should be reviewed periodically.
Limit breaches require escalation and analysis.
A limit should not be increased merely to conceal a breach.
Funding assumptions should be stress-tested.
Cheapest funding is not automatically the most appropriate funding.
Contingency funding planning should consider loss of important normal funding sources.
Basel's current 2026 liquidity framework continues to require diversification across counterparties, instruments, currencies, markets and funding tenor.
Common Exam Traps
Trap 1: “A bank with many depositors cannot have funding concentration.”
Incorrect. Concentration may exist by instrument, tenor, currency or market even if counterparties are numerous.
Trap 2: “The cheapest funding source is always preferable.”
Incorrect. Stability, maturity, concentration and stress availability also matter.
Trap 3: “Wholesale funding should never be used.”
Incorrect. It can be an appropriate funding source. The risk arises from excessive concentration or volatility.
Trap 4: “Short-term funding is safe if it has always been renewed.”
Incorrect. Historical rollover does not guarantee future refinancing during stress.
Trap 5: “Rupee liquidity can always solve a US-dollar liquidity shortage.”
Incorrect. Currency conversion may be expensive or unavailable during stress.
Trap 6: “All securities owned by the bank can be used immediately to raise funds.”
Incorrect. Some may be encumbered, illiquid or subject to stressed haircuts.
Trap 7: “A funding limit breach is harmless if the bank currently has surplus liquidity.”
Incorrect. The breach may reveal excessive concentration or another structural vulnerability.
Trap 8: “Funding diversification means only having many counterparties.”
Incorrect. Diversification should also consider tenor, instrument, currency, market and secured versus unsecured sources.
Trap 9: “A funding source listed in the liquidity plan can be assumed to remain available during stress.”
Incorrect. Actual market access and fund-raising capacity should be assessed and tested.
Trap 10: “More deposits always reduce liquidity risk.”
Incorrect. A very large unstable deposit can increase concentration risk even while increasing today's cash balance.
Memory Technique
Remember C–I–T–C–M for funding diversification:
C — CounterpartyI — InstrumentT — TenorC — CurrencyM — Market
Then ask two additional questions:
Is the funding secured or unsecured?
Will it still be available under stress?
The central CAIIB principle is:
A resilient funding strategy does not merely raise enough funds today; it avoids excessive dependence on any source that may disappear tomorrow.