Question 1

Which of the following statements is true?

Accepted Answer

A)  In Australia, depositors received preference over other liability holders in the event of a liquidation of an FI. 
B)  In Australia, depositors receive preference over other liability holders in the event of a liquidation of an FI being replaced by a financial claims scheme to protect deposit accounts. 
C)  In Australia, only customers of the major banks are covered by deposit insurance. 
D)  Australia has had a well-developed deposit insurance system for decades that has protected depositors without a bank failure for over a century.

Question 2

Which of the following equations correctly defines an FI's financing requirements?

Accepted Answer

A)  Average loans - average deposits 
B)  Average deposits - average loans 
C)  Average loans - average deposits + liquid assets 
D)  Financing gap - liquid assets

Question 3

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 4

An FI's financing gap is the difference between an FI's:

Accepted Answer

A)  average core deposits and average loans. 
B)  average loans and average core deposits. 
C)  assets and liabilities. 
D)  liabilities and assets.

Question 5

Which of the following items may expose an FI to liquidity risk?

Accepted Answer

A)  $500 000 in demand deposits and $100 000 in overnight deposits made by another FI. 
B)  $500 000 in demand deposits and $50 000 in credit line facilities. 
C)  $500 000 in demand deposits, $100 000 in loan commitments and $50 000 in short-term securities. 
D)  $500 000 in demand deposits, $100 000 in overnight deposits made by another FI and $50 000 in credit line facilities.

Question 6

Consider the following situation: an FI holds two assets in equal proportions, these being liquid securities with a fair market value of $200 and housing loans with a fair market value of $800. Further assume that in case of immediate liquidation, the FI would receive $185 for its liquid securities and $700 for its housing loans. What is the FI's liquidity index (round to two decimals)?

Accepted Answer

A)  I = (185/200) + (700/800) = 1.80 
B)  I = (185/200) $\times$ (700/800) = 0.81 
C)  I = 0.5 $\times$ (185/200) + 0.5 $\times$ (700/800) = 0.90 
D)  I = [0.5 $\times$ (185/200)] $\times$ [0.5 $\times$(700/800)] = 0.20

Question 7

What are the two main liquidity facilities available to Australian FIs to prevent financial disturbances occurring?

Accepted Answer

A)  Deposit insurance and the discount window. 
B)  Intra-day repurchase agreement and overnight repurchase agreement. 
C)  Financing gap and the financing requirement. 
D)  Secondary credit and seasonal credit.

Question 8

Consider the following situation: an FI holds 40 per cent of its assets in liquid securities with a fair market value of $100 and the remaining 60 per cent of its assets in housing loans with a fair market value of $500. Further assume that in case of immediate liquidation, the FI would receive $90 for its liquid securities and $450 for its housing loans. What is the FI's liquidity index (round to two decimals)?

Accepted Answer

A)  0.19 
B)  0.54 
C)  0.67 
D)  0.90

Question 9

Cyclical liquidity needs are those which vary with the:

Accepted Answer

A)  seasonal cycle. 
B)  business cycle. 
C)  weather cycle, for example influencing droughts. 
D)  FI's maturity cycle.

Question 10

Australia has recently developed a market for deposit insurance guarantee that protects deposit accounts.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is a way in which an FI can raise liquidity?

Accepted Answer

A)  Sell liquid assets. 
B)  Borrow funds in money markets. 
C)  Use excess cash reserves over and above the amount held in its exchange settlement account with the RBA. 
D)  All of the listed options are correct.

Question 12

Which of the following statements is true?

Accepted Answer

A)  The financing requirement is the financing gap plus an FI's liquid assets. 
B)  The financing requirement is the financing gap minus an FI's liquid assets. 
C)  The financing requirement is the financing gap multiplied by an FI's liquid assets. 
D)  The financing requirement is the financing gap divided by an FI's liquid assets.

Question 13

An open-end fund is defined as an investment fund that sells:

Accepted Answer

A)  an elastic number of shares to outside investors. 
B)  a fixed number of shares to an elastic number of outside investors. 
C)  an elastic number of shares to outside investors, but that never buys back any of these shares. 
D)  a fixed number of shares to an elastic number of outside investors, but that never buys back any of these shares.

Question 14

Which of the following statements is true?

Accepted Answer

A)  The liquidity index compares the liquidity of a single institution with the industry average and thus measures the liquidity risk of that particular institution. 
B)  The liquidity index provides guidance for FIs on how much liquidity they should hold on a seasonal basis. 
C)  The liquidity index measures the potential losses an FI could suffer if new market entrants take away market share from the existing institutions. 
D)  The liquidity index measures the potential losses an FI could suffer from a sudden disposal of assets compared to the mount it would receive at a fair market value established under normal sales conditions.

Question 15

Use the following balance sheet (values in thousands of dollars) to answer the question.   If the bank experiences a $50 000 sudden liquidity drain caused by withdrawal of their demand deposits, what will be the impact on the balance sheet if purchased liquidity management techniques are used?

Accepted Answer

A)  A reduction in cash of $21 000 and a decrease in demand deposits of $29 000. 
B)  A reduction in securities and/or current loans totalling $50 000. 
C)  A reduction in demand deposits of $50 000 and an increase in interbank borrowings of $50 000. 
D)  A decrease in equity of $50 000.

Question 16

Discuss the advantages and disadvantages of stored liquidity management and purchased liquidity management. In your opinion, which is the better approach for a DI to adopt?

Accepted Answer

The answer of Discuss the advantages and disadvantages of stored...

Question 17

As part of the Basel III liquidity reforms the RBA will establish a secure committed liquidity facility.

Accepted Answer

A)  This is necessary due to the shortage of capital required to be held by FIs. 
B)  This is necessary due to the shortage of Australian government debt, T-bonds and T-notes, used in open market operations. 
C)  This is necessary due to the shortage of international funds to purchase repos. 
D)  All of the listed options are correct.

Question 18

A disadvantage of using asset management to manage an 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)  loss of flexibility as a result of dependence upon purchased liabilities.

Question 19

The maturity ladder model allows a comparison of cash inflows and cash outflows over a series of specified time periods.

Accepted Answer

A) True 
 B)False

Question 20

What are the main components of a liquidity plan? Discuss the vital role such a plan plays in reducing liquidity risk?

Accepted Answer

The answer of What are the main components of a...

Exam 14: Liquidity Risk

Which of the following statements is true?

Which of the following equations correctly defines an FI's financing requirements?

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.

An FI's financing gap is the difference between an FI's:

Which of the following items may expose an FI to liquidity risk?

What are the two main liquidity facilities available to Australian FIs to prevent financial disturbances occurring?

Cyclical liquidity needs are those which vary with the:

Australia has recently developed a market for deposit insurance guarantee that protects deposit accounts.

Which of the following is a way in which an FI can raise liquidity?

Which of the following statements is true?

An open-end fund is defined as an investment fund that sells:

Which of the following statements is true?

Use the following balance sheet (values in thousands of dollars) to answer the question. If the bank experiences a $50 000 sudden liquidity drain caused by withdrawal of their demand deposits, what will be the impact on the balance sheet if purchased liquidity management techniques are used?

Discuss the advantages and disadvantages of stored liquidity management and purchased liquidity management. In your opinion, which is the better approach for a DI to adopt?

As part of the Basel III liquidity reforms the RBA will establish a secure committed liquidity facility.

A disadvantage of using asset management to manage an FI's liquidity risk is:

The maturity ladder model allows a comparison of cash inflows and cash outflows over a series of specified time periods.

What are the main components of a liquidity plan? Discuss the vital role such a plan plays in reducing liquidity risk?