Question 1

Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.

Accepted Answer

A) True 
 B)False

Question 2

In general, money center banks are exposed to less liquidity risk than smaller, regional banks.

Accepted Answer

A) True 
 B)False

Question 3

Insurance companies have had to deal with liability runs by policyholders.

Accepted Answer

A) True 
 B)False

Question 4

Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.

Accepted Answer

A) True 
 B)False

Question 5

Why have purchased liquidity management techniques become very popular in spite of its limitations?

Accepted Answer

A) Because it insulates the assets of an FI from normal drains on liability liquidity. 
B) Because funds can be easily raised in the eventuality of a liquidity crunch. 
C) Because of decrease in the cost of funds during periods of high interest rate volatility. 
D) Because the funds are covered by deposit insurance. 
E) Because the adjustment to the deposit drain occurs on the liability side of the balance sheet. 
A) Because it insulates the assets of an FI from normal drains on liability liquidity. 
B) Because funds can be easily raised in the eventuality of a liquidity crunch. 
C) Because of decrease in the cost of funds during periods of high interest rate volatility. 
D) Because the funds are covered by deposit insurance. 
E) Because the adjustment to the deposit drain occurs on the liability side of the balance sheet.

Question 6

-If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down, what will be the impact on the balance sheet if stored liquidity management techniques are used?

Accepted Answer

A) A reduction in cash of $21,000 and an increase in demand deposits of $29,000. 
B) A reduction in securities and/or current loans totaling $50,000. 
C) A reduction in cash of $21,000 and a decrease in securities holdings of $29,000. 
D) A decrease in equity of $50,000. 
E) A decrease in lending of $50,000. 
A) A reduction in cash of $21,000 and an increase in demand deposits of $29,000. 
B) A reduction in securities and/or current loans totaling $50,000. 
C) A reduction in cash of $21,000 and a decrease in securities holdings of $29,000. 
D) A decrease in equity of $50,000. 
E) A decrease in lending of $50,000.

Question 7

A bank must be ready to pay out all demand deposit liabilities on any given day.

Accepted Answer

A) True 
 B)False

Question 8

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.
-What will be the size of the bank if a purchased liquidity management strategy is adopted?

Accepted Answer

A) $9 million. 
B) $11 million. 
C) $12 million. 
D) $14 million. 
E) $15 million. 
A) $9 million. 
B) $11 million. 
C) $12 million. 
D) $14 million. 
E) $15 million.

Question 9

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Accepted Answer

A) True 
 B)False

Question 10

The cost of stored liquidity management is the interest that must be paid on the stored funds.

Accepted Answer

A) True 
 B)False

Question 11

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

Accepted Answer

A) A $96,007 reduction in assets. 
B) A $96,007 increase in assets. 
C) A $100,000 reduction in assets. 
D) A $100,000 increase in assets. 
E) A $100,000 increase in liabilities. 
A) A $96,007 reduction in assets. 
B) A $96,007 increase in assets. 
C) A $100,000 reduction in assets. 
D) A $100,000 increase in assets. 
E) A $100,000 increase in liabilities.

Question 12

The liquidity index should be a number that is either greater than one or less than zero.

Accepted Answer

A) True 
 B)False

Question 13

Which intermediation function results in an FI's exposure to liquidity risk?

Accepted Answer

A) Information production. 
B) Asset transformation. 
C) Conduit for monetary policy. 
D) Lender of last resort. 
E) Brokering between funds deficit units and funds surplus units. 
A) Information production. 
B) Asset transformation. 
C) Conduit for monetary policy. 
D) Lender of last resort. 
E) Brokering between funds deficit units and funds surplus units.

Question 14

In a crisis, which of the following are relatively less 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) Pension funds. 
A) Correspondent banks. 
B) Small business corporations. 
C) Individual depositors. 
D) Mutual funds. 
E) Pension funds.

Question 15

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Accepted Answer

A) True 
 B)False

Question 16

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

Accepted Answer

A) Sovereign debt. 
B) Bank capital. 
C) Government guaranteed mortgage-backed securities. 
D) Central bank reserves. 
E) Cash. 
A) Sovereign debt. 
B) Bank capital. 
C) Government guaranteed mortgage-backed securities. 
D) Central bank reserves. 
E) Cash.

Question 18

If purchased liquidity is used by a DI to fund an exercised loan commitment

Accepted Answer

A) the balance sheet will decrease by the amount of the new loan. 
B) only the asset side of the balance sheet will increase. 
C) the balance sheet will increase by the amount of the new loan. 
D) only the liability side of the balance sheet will increase. 
E) there will be no effect on the balance sheet. 
A) the balance sheet will decrease by the amount of the new loan. 
B) only the asset side of the balance sheet will increase. 
C) the balance sheet will increase by the amount of the new loan. 
D) only the liability side of the balance sheet will increase. 
E) there will be no effect on the balance sheet.

Question 19

Which of the following is NOT a primary source of liquidity?

Accepted Answer

A) Excess cash reserves over and above regulatory reserve requirements. 
B) Borrowings in the money market. 
C) Borrowings in the purchased funds market. 
D) Capital notes and other long-term financing alternatives. 
E) Cash-type assets that can be sold with little price risk and low transaction costs. 
A) Excess cash reserves over and above regulatory reserve requirements. 
B) Borrowings in the money market. 
C) Borrowings in the purchased funds market. 
D) Capital notes and other long-term financing alternatives. 
E) Cash-type assets that can be sold with little price risk and low transaction costs.

Question 20

An FI's most liquid asset is cash.

Accepted Answer

A) True 
 B)False

Exam 12: Liquidity Risk

Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.

In general, money center banks are exposed to less liquidity risk than smaller, regional banks.

Insurance companies have had to deal with liability runs by policyholders.

Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.

Why have purchased liquidity management techniques become very popular in spite of its limitations?

-If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down, what will be the impact on the balance sheet if stored liquidity management techniques are used?

A bank must be ready to pay out all demand deposit liabilities on any given day.

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

The cost of stored liquidity management is the interest that must be paid on the stored funds.

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

The liquidity index should be a number that is either greater than one or less than zero.

Which intermediation function results in an FI's exposure to liquidity risk?

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

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

If purchased liquidity is used by a DI to fund an exercised loan commitment

Which of the following is NOT a primary source of liquidity?

An FI's most liquid asset is cash.

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