Exam 21: Managing Liquidity Risk on the Balance Sheet

A bank meets a deposit withdrawal with one of the following alternatives. Which one of the following is an example of using stored liquidity to meet a deposit withdrawal?

Describe the major components of a liquidity plan.

Using stored liquidity to offset a deposit drain will reduce the size of the bank,but using purchased liquidity to offset the drain will not.

A widely accepted method measuring liquidity risk exposure of a DI is core deposits over total assets ratio.

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?

BIS' Basel Committee on Banking Supervision provides regulatory standards for liquidity risk supervision. Which of the following are among the new ratios required to be maintained by large DIs? I. Liquidity coverage ratio II. Net stable funds ratio III. Financing gap over total asset ratio IV. Core deposits over financing gap ratio

How does reliance on purchased liquidity rather than core deposits affect a bank? I. Increases the risk of a liquidity crisis II. Allows the bank to adjust to deposit drains without affecting bank size III. Increases overall interest sensitivity of the bank's profits to interest rates

Explain how liquidity risk can lead to insolvency risk.

The greater the discount required to sell assets quickly,the higher the value of the bank's liquidity index.

The BIS guidelines for monitoring intraday liquidity risk at internationally active banks include which of the following: I. Measure expected daily gross liquidity inflows and outflows,anticipate the intraday timing of these flows where possible,and forecast the range of potential net funding shortfalls that might arise at different points during the day. II. Monitor intraday liquidity positions against expected activities and available resources. III. Arrange to acquire sufficient intraday funding to meet intraday objectives. IV. Have the ability to maintain a collateral-to-asset ratio above the minimum required by BIS.

What are the major sources of liquidity risk for a bank? For a life insurer?

You have the following data for a bank (million $): Calculate the net funding requirement for each period and the cumulative net funding requirement over the month. What does the plan reveal?

Which one of the following situations creates the most liquidity risk?

If a bank's brokered deposits increase $3 million and their savings accounts decrease $1 million,then core deposits decreased.

When calculating the liquidity index,the larger the discount from fair value,the ________ the liquidity index; and the ________ the liquidity risk the FI faces.

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.

Core deposits include all but which of the following?

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

Why might a bank face abnormal deposit drains?

The amount that a policyholder receives when he or she cashes in an insurance policy is called the