Question 1

Which of the following is a condition for a DI to be growing?

Accepted Answer

A) Net positive drain on deposits. 
B) Peak of the net deposit drain probability distribution should lie at a point to the right of zero. 
C) Average deposit drains such that new deposit funds more than offset deposit withdrawals. 
D) The liability side of its balance sheet is decreasing. 
E) Unused loan commitments is increasing. 
A) Net positive drain on deposits. 
B) Peak of the net deposit drain probability distribution should lie at a point to the right of zero. 
C) Average deposit drains such that new deposit funds more than offset deposit withdrawals. 
D) The liability side of its balance sheet is decreasing. 
E) Unused loan commitments is increasing.

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is regarding available stable funding (ASF) is not true?

Accepted Answer

A) ASF includes bank capital, preferred stock with a maturity of less than 1 year. 
B) ASF includes liabilities with maturities less than 1 year. 
C) The portion of retail deposits and wholesale deposit expected to stay with bank during a period of idiosyncratic stress. 
D) All of the above are true. 
E) All of the above are not true. 
A) ASF includes bank capital, preferred stock with a maturity of less than 1 year. 
B) ASF includes liabilities with maturities less than 1 year. 
C) The portion of retail deposits and wholesale deposit expected to stay with bank during a period of idiosyncratic stress. 
D) All of the above are true. 
E) All of the above are not true.

Question 5

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 6

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 7

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 8

Most demand deposits stay at DIs for periods of two years or more.

Accepted Answer

A) True 
 B)False

Question 9

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 10

Liquidity risk is a normal aspect of everyday management of an FI.

Accepted Answer

A) True 
 B)False

Question 11

The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.

Accepted Answer

A) True 
 B)False

Question 12

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 13

If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds, what policy must the bank follow?

Accepted Answer

A) Manage liquidity risk exclusively through reserve asset management. 
B) Manage liquidity risk exclusively through liability management. 
C) Reduce the bank's dependence upon demand deposits. 
D) Increase interest income by increasing lending. 
E) Increase interest income by increasing securities holdings. 
A) Manage liquidity risk exclusively through reserve asset management. 
B) Manage liquidity risk exclusively through liability management. 
C) Reduce the bank's dependence upon demand deposits. 
D) Increase interest income by increasing lending. 
E) Increase interest income by increasing securities holdings.

Question 14

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 options. 
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 options.

Question 15

When liquidity risk problems occur at a DI, they often threaten the solvency of the institution.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) Liquidate all cash holdings. 
B) Utilize further the Fed funds market. 
C) Liquidate some securities and/or loans. 
D) Liquidate all cash and use more Fed funds. 
E) All of the options are suitable techniques. 
A) Liquidate all cash holdings. 
B) Utilize further the Fed funds market. 
C) Liquidate some securities and/or loans. 
D) Liquidate all cash and use more Fed funds. 
E) All of the options are suitable techniques.

Question 17

Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

In addition to LCR and NSFR, regulators adopt which of the following additional monitoring measures?

Accepted Answer

A) Contractual maturity mismatch. 
B) Concentration of funding. 
C) Available unencumbered asset. 
D) Market-related monitoring tools. 
E) All of the above are additional monitoring mesures. 
A) Contractual maturity mismatch. 
B) Concentration of funding. 
C) Available unencumbered asset. 
D) Market-related monitoring tools. 
E) All of the above are additional monitoring mesures.

Exam 12: Liquidity Risk

Which of the following is a condition for a DI to be growing?

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

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

Which of the following statements is regarding available stable funding (ASF) is not true?

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

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

What are the two major liquidity risk insulation devices available?

Most demand deposits stay at DIs for periods of two years or more.

Liquidity risk is a normal aspect of everyday management of an FI.

The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.

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

If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds, what policy must the bank follow?

Which of the following observations is NOT true?

When liquidity risk problems occur at a DI, they often threaten the solvency of the institution.

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

Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.

The surrender value of an insurance policy is

In addition to LCR and NSFR, regulators adopt which of the following additional monitoring measures?

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

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

Loan Sales

Securitization

Filters