Exam 21: Managing Liquidity Risk on the Balance Sheet

Bank A has a loan-to-deposit ratio of 110 percent,core deposits equal 55 percent of total assets,and borrowed funds are 25 percent of assets. Bank B has a loan-to-deposit ratio of 80 percent. Core deposits are 65 percent of assets and borrowed funds are 5 percent of assets. Which bank has more liquidity risk? Ceteris paribus,which bank will probably be more profitable when interest rates are low?

The greater the _________________ ratio,the more liquid is the institution,ceteris paribus.

The BIS recommends that depository institutions do which of the following to realistically measure liquidity risk? I. Construct a maturity ladder of funding requirements over both the short and long run. II. Conduct scenario analyses of the bank's implied liquidity position under different bank and economic conditions. III. Always keep the loan-to-deposit ratio less than one.

Does a positive or a negative financing gap indicate greater liquidity risk? Explain.

The two main reasons why runs on U.S. banks no longer occur are

A financial intermediary has two assets in its investment portfolio. It has 35 percent of its security portfolio invested in one-month Treasury bills and 65 percent in real estate loans. If it liquidated the bills today,the bank would receive $98 per hundred of face value. If the real estate loans were sold today,they would be worth $85 per 100 of face value. In one month,the real estate loans could be liquidated at $94 per 100 of face value. What is the intermediary's one-month liquidity index?

A corporation informs the bank that it will immediately draw down the maximum amount on its credit line. This is an example of liability side risk.