The rate a bank pays to raise money, which it passes to business lines through internal pricing. Ignoring it can reward risky, liquidity-draining activity.
Where you will meet it
Funding cost comes up in 14 learning outcome notes across the FRM syllabus.
A few of them:
Introduction to Credit Risk Modeling and Assessment FRM Part II · Credit risk measurement and management
“Revenues are interest and fees net of funding cost, costs are operating costs, and expected loss is subtracted because it is an expected cost of lending.”
The Global Drivers of Private Credit FRM Part II · Current issues in financial markets
“Banks and private credit funds compete for the same borrowers on funding cost and leverage.”
Liquidity and Leverage FRM Part II · Liquidity and treasury risk measurement and management
“Funds transfer pricing charges business lines for term funding, and stress tests check the run-off assumptions.”
Range of practices and issues in economic capital frameworks FRM Part II · Operational risk and resilience
“In pricing, the minimum spread covers funding cost, operating cost, expected loss and a charge for the capital used, so riskier loans cost more.”
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