Exam 18: Liability and Liquidity Management

Fed funds are short-term uncollateralized loans with maturities that typically do not exceed one day.

In October 2008,the opportunity cost of holding excess reserves for U.S.DIs

In the U.S. ,MMDAs typically are transaction accounts without limitations on the size or number of checks or transfers that can occur each month.

Excessive illiquidity can result in an FI's inability to meet required payments on liability claims and,at the extreme,in insolvency.

Under contemporaneous reserve accounting the

By definition,all transaction accounts at U.S.FIs allow account holders to make unlimited withdrawals.

Property-casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage across different types of disasters.

Excessive amounts of liquid asset holdings can penalize the earnings of a DI.

Which of the following is the result of using "sweep accounts" in which high reserve ratio demand deposits are "swept" out of customers' accounts on Friday into higher interest-bearing savings accounts?

Michelle has maintained an average balance of $300 per month for the first three months of the year,$800 per month for the next three months,and $1,000 per month for the final six months of the year in a NOW account.It requires a minimum balance of $500 to be maintained if annual interest of 5 percent is to be earned.She writes an average of 25 checks per month but the account does not have a service charge for checks although it costs the bank 10 cents to process each check. Suppose the minimum balance to earn interest was lowered from $500 to $300 and she now pays a service charge of 5 cents per check.Note that it costs the bank 10 cents to process each check.What is her annual gross interest return?

One method of increasing reserves to meet a reserve target is to sell liquid assets.

Which of the following observations is NOT true of a liquid asset?

Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

Medium term notes issued by a U.S.DI

Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash,T-bills,and T-bonds to reduce liquidity risk?

In the U.S. ,excess reserves held at the central bank pay interest to the DI.

The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.

Recently banks have changed the liability structure towards instruments that have less withdrawal risk and higher explicit interest costs.

Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.