Deck 6: Liquidity Risk

Question 1

Lender-of-last-resort LOLR moral hazard is:

A)the problem that the bank will keep too little liquidity because it knows the LOLR will provide it.
B)the problem that the LOLR may not provide the bank access to liquidity when needed.
C)the problem that the bank's financiers will not give it access to liquidity because they know the LOLR will provide it.

Answer 1

the problem that the bank will keep too little liquidity because it knows the LOLR will provide it.

Question 2

Lender-of-last-resort LOLR) moral hazard is:

A)the problem that the bank will keep too little liquidity because it knows the LOLR will provide it.
B)the problem that the LOLR may not provide the bank access to liquidity when needed.
C)the problem that the bank's financiers will not give it access to liquidity because they know the LOLR will provide it.

Answer 2

A

Question 3

Liquidity risk is related to default risk because ________________________.

Answer 3

If a sudden need for liquidity forces you to sell illiquid assets quickly, the value realized may be so low that it can impair solvency, so liquidity risk can trigger default risk.Also, unexpectedly high defaults can raise concerns about insolvency, causing funding to dry up.So default risk can create liquidity risk.

Question 4

The central elements) of liquidity risk isare)

A)the speed at which deposits can be raised
B)the speed at which an asset can be sold
C)the asset sold should not lose much of its value at the time of conversion
D)the asset can be sold at any price
E)both b and c

Question 5

Liquidity risk is defined as ________________________________________.

Question 6

Liquidity risk can be reduced by ___________________________________.

Question 7

Liquidity risk is related to interest rate risk because ____________________.