Question 1

During the financial crisis of 2008, there were large deposit inflows to the banking system.

Accepted Answer

A) True 
 B)False

Question 2

How does purchased liquidity management affect profitability?

Accepted Answer

A) By its impact on the interest rate sensitivity of assets. 
B) By its impact on the interest rate sensitivity of liabilities. 
C) By determining the default risk of investment securities. 
D) By its impact on the cost of purchased funds. 
E) By enhancing the liquidity of assets held. 
A) By its impact on the interest rate sensitivity of assets. 
B) By its impact on the interest rate sensitivity of liabilities. 
C) By determining the default risk of investment securities. 
D) By its impact on the cost of purchased funds. 
E) By enhancing the liquidity of assets held.

Question 3

Which type of financial intermediary is more highly exposed to liquidity risk?

Accepted Answer

A) Property & casualty insurance companies. 
B) Life insurance companies. 
C) Mutual funds. 
D) Deposit-taking institutions. 
E) Pension funds. 
A) Property & casualty insurance companies. 
B) Life insurance companies. 
C) Mutual funds. 
D) Deposit-taking institutions. 
E) Pension funds.

Question 4

Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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) Deposits with the central bank. 
E) Cash. 
A) Sovereign debt. 
B) Bank capital. 
C) Government guaranteed mortgage-backed securities. 
D) Deposits with the central bank. 
E) Cash.

Question 7

Purchased liquidity risk management usually involves purchased funds such as interbank funds, repurchase agreements and wholesale GICs.

Accepted Answer

A) True 
 B)False

Question 8

What is the drawback of deposit insurance facility?

Accepted Answer

A) Even when the DTI is in trouble, the deposit holder has no incentive to run. 
B) DTIs 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 DTI is in trouble, the deposit holder has no incentive to run. 
B) DTIs 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 9

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 10

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 11

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 12

A bank's net deposit drain

Accepted Answer

A) is negative if deposits exceed withdrawals. 
B) is positive if deposits exceed withdrawals. 
C) decreases during holiday and vacation periods. 
D) in unaffected by holiday and vacation periods. 
E) fluctuates unpredictably on any given day. 
A) is negative if deposits exceed withdrawals. 
B) is positive if deposits exceed withdrawals. 
C) decreases during holiday and vacation periods. 
D) in unaffected by holiday and vacation periods. 
E) fluctuates unpredictably on any given day.

Question 13

Liquid funds can be obtained by a DTI through unlimited borrowing in the money or purchased funds markets.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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.

Question 16

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) Bonds. 
B) Borrowing from the Bank of Canada. 
C) Demand deposit. 
D) Repurchase agreement. 
E) Subordinated note. 
A) Bonds. 
B) Borrowing from the Bank of Canada. 
C) Demand deposit. 
D) Repurchase agreement. 
E) Subordinated note.

Question 18

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 12: Liquidity Risk

During the financial crisis of 2008, there were large deposit inflows to the banking system.

How does purchased liquidity management affect profitability?

Which type of financial intermediary is more highly exposed to liquidity risk?

Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.

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

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

Purchased liquidity risk management usually involves purchased funds such as interbank funds, repurchase agreements and wholesale GICs.

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.

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

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

A bank's net deposit drain

Liquid funds can be obtained by a DTI through unlimited borrowing in the money or purchased funds markets.

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

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

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

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

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

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

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

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

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 Index

Filters