Question 1

What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques?

Accepted Answer

A) Utilize further the Fed funds market. 
B) Utilize repurchase agreements. 
C) Liquidate all cash holdings. 
D) All of the options. 
E) Utilize further the Fed funds market and repurchase agreements. 
A) Utilize further the Fed funds market. 
B) Utilize repurchase agreements. 
C) Liquidate all cash holdings. 
D) All of the options. 
E) Utilize further the Fed funds market and repurchase agreements.

Question 2

Which of the following is NOT a potential cause of liquidity risk for a DI?

Accepted Answer

A) A decrease in the DI's stock price caused by market factors. 
B) An increase in requests to fund large amounts of loan commitments. 
C) A decrease in the availability of short-term borrowed funds. 
D) An increase in requests by depositors to withdrawal large amounts of deposits. 
E) A decrease in asset prices of securities held in the investment portfolio. 
A) A decrease in the DI's stock price caused by market factors. 
B) An increase in requests to fund large amounts of loan commitments. 
C) A decrease in the availability of short-term borrowed funds. 
D) An increase in requests by depositors to withdrawal large amounts of deposits. 
E) A decrease in asset prices of securities held in the investment portfolio.

Question 3

Both PC and life insurance companies have had to deal with liability runs by policyholders seeking to cash out their policies before maturity.

Accepted Answer

A) True 
 B)False

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

Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

Accepted Answer

A) True 
 B)False

Question 6

When using peer group comparisons to determine liquidity risk of a DI, peer groups are defined by the Federal Reserve.

Accepted Answer

A) True 
 B)False

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

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 9

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 10

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 11

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 12

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 total available sources of liquidity?

Accepted Answer

A) $17 million. 
B) $18 million. 
C) $20 million. 
D) $21 million. 
E) $22 million. 
A) $17 million. 
B) $18 million. 
C) $20 million. 
D) $21 million. 
E) $22 million.

Question 13

As of 2014, all U.S.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 14

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

Accepted Answer

A) the resulting shrinkage of the FI's balance sheet. 
B) the 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 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 15

Mutual funds tend to have more exposure to liquidity risk than banks and thrifts.

Accepted Answer

A) True 
 B)False

Question 16

It is impossible for money market mutual fund share prices to fall below $1.00.

Accepted Answer

A) True 
 B)False

Question 17

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 18

Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?

Accepted Answer

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

Exam 12: Liquidity Risk

What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques?

Which of the following is NOT a potential cause of liquidity risk for a DI?

Both PC and life insurance companies have had to deal with liability runs by policyholders seeking to cash out their policies before maturity.

Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

When using peer group comparisons to determine liquidity risk of a DI, peer groups are defined by the Federal Reserve.

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

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

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

What is the drawback of deposit insurance facility?

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.

As of 2014, all U.S.banks must report their The Liquidity Coverage Ratio (LCR) to the FDIC rather than to the Federal Reserve.

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

Mutual funds tend to have more exposure to liquidity risk than banks and thrifts.

It is impossible for money market mutual fund share prices to fall below $1.00.

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

Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.

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

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

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Financial Services: Securities Brokerage and Investment Banking

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Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Foreign Exchange Risk

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Market Risk

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Technology and Other Operational Risks

Fintech 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

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