Exam 21: Managing Liquidity Risk on the Balance Sheet

A bank has $6 million in Treasury bills,$3 million in excess reserves at the Fed,$1 million in vault cash,and an $8 million line of credit on the repo market. The bank has borrowed $6 million in fed funds and $12 million in short-term notes borrowed to finance loans. What is the net liquidity position of the bank and what can you conclude from it?

Which of the following results in a net liquidity drain?

Core deposits include all but which of the following?

Using stored liquidity to offset a deposit drain will reduce the size of the bank,but using purchased liquidity to offset the drain will not.

What are the trade-offs involved between storing liquidity and purchasing liquidity as needed for a bank?

Explain the relationship between each of the following ratios and liquidity risk.

Which one of the following situations creates the most liquidity risk?

A married couple each has an IRA and deposits at a bank. The couple also has one child. If they had the money,what is the total amount of their accounts that could be insured at one bank?

Describe the major components of a liquidity plan.

Which one of the following is a source of liquidity risk for a bank?

You have the following data for a bank (Million $):

When money market interest rates are higher than deposit rates,using purchased liquidity to replace deposit drains can reduce a bank's profit margin.

Property and casualty insurers have a greater need for liquidity than life insurers.

How does reliance on purchased liquidity rather than core deposits affect a bank? I. Increases the risk of a liquidity crisis II. Allows the bank to adjust to deposit drains without affecting bank size III. Increases overall interest sensitivity of the bank's profits to interest rates

If a bank's brokered deposits increase $3 million and their savings accounts decrease $1 million,then core deposits decreased.

The greater the discount required to sell assets quickly,the higher the value of the bank's liquidity index.

What are the major sources of liquidity risk for a bank? For a life insurer?

The Fed now operates the discount window differently than it used to. What are the major changes?

Closed-end mutual funds have less need to maintain liquid asset holdings than open-end mutual funds.

We rarely see bank runs since the advent of Federal Deposit Insurance,but runs on life insurers and mutual funds do occur even though claimants have pro rata claims in the event of default. Why do these runs still occur?