Question 1

As of 2012, banks must report their The Liquidity Coverage Ratio (LCR) to the FDIC rather than to the Federal Reserve.

Accepted Answer

A) True 
 B)False

Question 2

During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is NOT true?

Accepted Answer

A) Stored liquidity management involves liquidation of assets. 
B) Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults to overcome liquidity risk. 
C) When the DI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract. 
D) DIs hold cash reserves in excess of the minimum required to meet liquidity drains. 
E) A DI sustains no cost under stored liquidity risk management. 
A) Stored liquidity management involves liquidation of assets. 
B) Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults to overcome liquidity risk. 
C) When the DI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract. 
D) DIs hold cash reserves in excess of the minimum required to meet liquidity drains. 
E) A DI sustains no cost under stored liquidity risk management.

Question 4

A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the DI must liquidate its T-bills today, it receives $98 per $100 of face value; if it can wait to liquidate them on maturity (in one month's time), it will receive $100 per $100 of face value. If the DI has to liquidate its real estate loans today, it receives $90 per $100 of face value liquidation at the end of one month will produce $92 per $100 of face value. The one-month liquidity index value for this DI's asset portfolio is

Accepted Answer

A) .973. 
B) .940. 
C) .979. 
D) 1.06. 
E) 1.10. 
A) .973. 
B) .940. 
C) .979. 
D) 1.06. 
E) 1.10.

Question 5

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 is the net liquidity of the bank?

Accepted Answer

A) $7 million. 
B) $12 million. 
C) $17 million. 
D) $21 million. 
E) $22 million. 
A) $7 million. 
B) $12 million. 
C) $17 million. 
D) $21 million. 
E) $22 million.

Question 6

A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is

Accepted Answer

A) the resulting shrinkage of the FI's balance sheet. 
B) the relatively high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
E) loss of flexibility as a result of dependence upon purchased liabilities. 
A) the resulting shrinkage of the FI's balance sheet. 
B) the relatively high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
E) loss of flexibility as a result of dependence upon purchased liabilities.

Question 7

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.
-Assume that the T-Bills can only be sold at a 10 percent discount, what is the net liquidity of the bank given this information?

Accepted Answer

A) $6.5 million. 
B) $11.5 million. 
C) $16.5 million. 
D) $20.5 million. 
E) $21.5 million. 
A) $6.5 million. 
B) $11.5 million. 
C) $16.5 million. 
D) $20.5 million. 
E) $21.5 million.

Question 8

The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DI's portfolio of assets.

Accepted Answer

A) True 
 B)False

Question 9

The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.

Accepted Answer

A) True 
 B)False

Question 10

In terms of liquidity risk measurement, the financing gap is defined as rate sensitive assets minus rate sensitive liabilities.

Accepted Answer

A) True 
 B)False

Question 11

Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following balance sheet entries is not a tool used in purchased liquidity management?

Accepted Answer

A) Bonds. 
B) Federal fund. 
C) Demand deposit. 
D) Repurchase agreement. 
E) Subordinated note. 
A) Bonds. 
B) Federal fund. 
C) Demand deposit. 
D) Repurchase agreement. 
E) Subordinated note.

Question 13

A problem exists with the net stable funds ratio (NSFR) in that it does not include off-balance-sheet activities.

Accepted Answer

A) True 
 B)False

Question 14

A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.

Accepted Answer

A) True 
 B)False

Question 15

The surrender value of an insurance policy is

Accepted Answer

A) its promised payoff. 
B) normally a portion of the contract's face value. 
C) its value upon bankruptcy. 
D) the value of the junk bonds in the insurance company's portfolio. 
E) its holdup value. 
A) its promised payoff. 
B) normally a portion of the contract's face value. 
C) its value upon bankruptcy. 
D) the value of the junk bonds in the insurance company's portfolio. 
E) its holdup value.

Question 16

Which of the following observations is NOT true?

Accepted Answer

A) Traditionally, DI managers have relied on purchased liquidity management as the primary mechanism of liquidity management. 
B) Today, many DIs rely on purchased liquidity management to deal with the risk of cash shortfalls. 
C) The largest banks with access to the money market and other nondeposit markets for funds rely on purchased liquidity management to deal with the risk of cash shortfalls. 
D) Purchased liquidity management and stored liquidity management are ways of managing a drain on deposits. 
E) None of the above. 
A) Traditionally, DI managers have relied on purchased liquidity management as the primary mechanism of liquidity management. 
B) Today, many DIs rely on purchased liquidity management to deal with the risk of cash shortfalls. 
C) The largest banks with access to the money market and other nondeposit markets for funds rely on purchased liquidity management to deal with the risk of cash shortfalls. 
D) Purchased liquidity management and stored liquidity management are ways of managing a drain on deposits. 
E) None of the above.

Question 17

Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements.

Accepted Answer

A) True 
 B)False

Question 18

Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.

Accepted Answer

A) True 
 B)False

Question 19

What are the two major liquidity risk insulation devices available?

Accepted Answer

A) Deposit insurance and discount window. 
B) Liquidity planning and maturity ladder. 
C) Scenario analysis and liquidity index. 
D) Financing gap and the financing requirement. 
E) Secondary credit and seasonal credit. 
A) Deposit insurance and discount window. 
B) Liquidity planning and maturity ladder. 
C) Scenario analysis and liquidity index. 
D) Financing gap and the financing requirement. 
E) Secondary credit and seasonal credit.

Question 20

Which of the following is NOT used as a method of measuring liquidity risk?

Accepted Answer

A) Liquidity coverage ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio comparison. 
E) Current ratio. 
A) Liquidity coverage ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio comparison. 
E) Current ratio.

Exam 12: Liquidity Risk

As of 2012, banks must report their The Liquidity Coverage Ratio (LCR) to the FDIC rather than to the Federal Reserve.

During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.

Which of the following statements is NOT true?

A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is

The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DI's portfolio of assets.

The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.

In terms of liquidity risk measurement, the financing gap is defined as rate sensitive assets minus rate sensitive liabilities.

Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

Which of the following balance sheet entries is not a tool used in purchased liquidity management?

A problem exists with the net stable funds ratio (NSFR) in that it does not include off-balance-sheet activities.

A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.

The surrender value of an insurance policy is

Which of the following observations is NOT true?

Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements.

Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.

What are the two major liquidity risk insulation devices available?

Which of the following is NOT used as a method of measuring liquidity risk?

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