Question 1

The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) proposed by the Bank for International Settlements are scheduled to take effect in

Accepted Answer

A) 2011 for LCR and 2014 for NSFR. 
B) 2012 for both LCR and NSFR. 
C) 2015 for LCR and 2018 for NSFR. 
D) 2013 for LCR and 2016 for NSFR. 
E) 2014 for both LCR and NSFR. 
A) 2011 for LCR and 2014 for NSFR. 
B) 2012 for both LCR and NSFR. 
C) 2015 for LCR and 2018 for NSFR. 
D) 2013 for LCR and 2016 for NSFR. 
E) 2014 for both LCR and NSFR. C

Question 2

Core deposits represent a relatively short-term source of funds.

Accepted Answer

A) True 
 B)False  False

Question 3

For a DI, what does a high ratio of loans to deposits indicate?

Accepted Answer

A) DI relies heavily on the short-term money market to fund loans. 
B) High degree of loan commitments. 
C) DI has large amounts of asset-side liquidity. 
D) Liquidity concerns are at a bare minimum for the FI. 
E) DI relies heavily on core deposits to fund loans. 
A) DI relies heavily on the short-term money market to fund loans. 
B) High degree of loan commitments. 
C) DI has large amounts of asset-side liquidity. 
D) Liquidity concerns are at a bare minimum for the FI. 
E) DI relies heavily on core deposits to fund loans. A

Question 4

Which of the following statements is true?

Accepted Answer

A) Closed-end funds issue an unlimited number of shares as liabilities. 
B) Open-end funds supply limited number of shares to investors. 
C) Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. 
D) At a given market price, the supply of open-end fund shares is perfectly inelastic. 
E) The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them. 
A) Closed-end funds issue an unlimited number of shares as liabilities. 
B) Open-end funds supply limited number of shares to investors. 
C) Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. 
D) At a given market price, the supply of open-end fund shares is perfectly inelastic. 
E) The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them.

Question 5

The future liquidity position of a DI cannot be forecasted.

Accepted Answer

A) True 
 B)False

Question 6

What is a fire-sale price?

Accepted Answer

A) Market value of an asset. 
B) Price received for an asset that has to be liquidated immediately. 
C) Maximum price that will be received on sale of an asset irrespective of the time of sale. 
D) Replacement value of an asset. 
E) Book value of an asset. 
A) Market value of an asset. 
B) Price received for an asset that has to be liquidated immediately. 
C) Maximum price that will be received on sale of an asset irrespective of the time of sale. 
D) Replacement value of an asset. 
E) Book value of an asset.

Question 7

In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following observations concerning the Fed's discount window is true?

Accepted Answer

A) The facility is provided to meet DIs' permanent liquidity needs. 
B) Four lending programs are offered through the Fed's discount window. 
C) Primary credit is available to sound depository institutions on a very short-term basis. 
D) Secondary credit is available only to depository institutions that are eligible for primary credit. 
E) Eligible institutions for seasonal credit are big banks located in urban areas. 
A) The facility is provided to meet DIs' permanent liquidity needs. 
B) Four lending programs are offered through the Fed's discount window. 
C) Primary credit is available to sound depository institutions on a very short-term basis. 
D) Secondary credit is available only to depository institutions that are eligible for primary credit. 
E) Eligible institutions for seasonal credit are big banks located in urban areas.

Question 9

Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to shareholders on a first come, first served basis.

Accepted Answer

A) True 
 B)False

Question 10

When banks use stored liquidity management, they

Accepted Answer

A) must pay interest on the funds that are stored. 
B) store the funds at the U.S.Treasury. 
C) necessarily increase the asset side of the balance sheet. 
D) may shrink the balance sheet if cash is used as the liquidity adjustment mechanism. 
E) threaten the capital position of the institution. 
A) must pay interest on the funds that are stored. 
B) store the funds at the U.S.Treasury. 
C) necessarily increase the asset side of the balance sheet. 
D) may shrink the balance sheet if cash is used as the liquidity adjustment mechanism. 
E) threaten the capital position of the institution.

Question 11

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs.
-What are the bank's current total uses of liquidity?

Accepted Answer

A) $1 million. 
B) $3 million. 
C) $8 million. 
D) $10 million. 
E) $15 million. 
A) $1 million. 
B) $3 million. 
C) $8 million. 
D) $10 million. 
E) $15 million.

Question 12

When comparing banks and mutual funds,

Accepted Answer

A) mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
B) mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
C) mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
D) mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
E) mutual funds have the same liquidity risk as banks because both shareholders and depositors share the fall in the loss of value on a pro rata basis. 
A) mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
B) mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
C) mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
D) mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
E) mutual funds have the same liquidity risk as banks because both shareholders and depositors share the fall in the loss of value on a pro rata basis.

Question 13

Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.

Accepted Answer

A) True 
 B)False

Question 14

Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds markets.

Accepted Answer

A) True 
 B)False

Question 15

In terms of liquidity risk measurement, the financing gap is defined as

Accepted Answer

A) total deposits minus core deposits. 
B) financing requirement plus liquid assets. 
C) rate sensitive assets minus rate sensitive liabilities. 
D) total assets minus total liabilities. 
E) average loans minus average deposits. 
A) total deposits minus core deposits. 
B) financing requirement plus liquid assets. 
C) rate sensitive assets minus rate sensitive liabilities. 
D) total assets minus total liabilities. 
E) average loans minus average deposits.

Question 16

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?

Accepted Answer

A) Correspondent banks. 
B) Small business corporations. 
C) Individual depositors. 
D) Mutual funds. 
E) Foreign depositors. 
A) Correspondent banks. 
B) Small business corporations. 
C) Individual depositors. 
D) Mutual funds. 
E) Foreign depositors.

Question 17

When computing the liquidity coverage ratio, high-quality liquid assets are divided into two levels.

Accepted Answer

A) True 
 B)False

Question 18

What is the drawback of deposit insurance facility?

Accepted Answer

A) Even when the DI is in trouble, the deposit holder has no incentive to run. 
B) DIs are more likely to increase the liquidity risk on their balance sheets. 
C) Deposit holder's place in line affects his or her ability to obtain their funds. 
D) Deposit insurance does not deter contagious runs and panics. 
E) Deposit holders are less likely to panic if there is a perceived bank solvency problem. 
A) Even when the DI is in trouble, the deposit holder has no incentive to run. 
B) DIs are more likely to increase the liquidity risk on their balance sheets. 
C) Deposit holder's place in line affects his or her ability to obtain their funds. 
D) Deposit insurance does not deter contagious runs and panics. 
E) Deposit holders are less likely to panic if there is a perceived bank solvency problem.

Question 19

In terms of liquidity risk measurement, the financing requirement is defined as

Accepted Answer

A) total deposits minus core deposits. 
B) financing gap plus liquid assets. 
C) rate sensitive assets minus rate sensitive liabilities. 
D) total assets minus total liabilities. 
E) average loans minus average deposits. 
A) total deposits minus core deposits. 
B) financing gap plus liquid assets. 
C) rate sensitive assets minus rate sensitive liabilities. 
D) total assets minus total liabilities. 
E) average loans minus average deposits.

Question 20

An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.

Accepted Answer

A) True 
 B)False

Exam 12: Liquidity Risk

The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) proposed by the Bank for International Settlements are scheduled to take effect in

Core deposits represent a relatively short-term source of funds.

For a DI, what does a high ratio of loans to deposits indicate?

Which of the following statements is true?

The future liquidity position of a DI cannot be forecasted.

What is a fire-sale price?

In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.

Which of the following observations concerning the Fed's discount window is true?

Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to shareholders on a first come, first served basis.

When banks use stored liquidity management, they

When comparing banks and mutual funds,

Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.

Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds markets.

In terms of liquidity risk measurement, the financing gap is defined as

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?

When computing the liquidity coverage ratio, high-quality liquid assets are divided into two levels.

What is the drawback of deposit insurance facility?

In terms of liquidity risk measurement, the financing requirement is defined as

An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters