On the one hand, choosing to meet loan growth through wholesale funding rather than attempting to attract new money market accounts, for example, may avoid a costly rate hike on existing deposits. On the other hand, institutions should consider the costs of choosing wholesale funds in lieu of building the institution's retail funding base.
The VAR-based approach is insufficient for these types of exposures and needs to be supplemented with a default risk charge. In addition, it is critical that banks conduct rigorous Pillar 2 stress testing of their trading book exposures. They must factor in liquidity horizons and reflect these results in their risk limits, economic capital and concentration management strategies.