Deck 11: Liquidity Management

Question 1

Asset liquidity and liability management are essentially the same or identical concepts.

Answer 1

False

Question 2

The first step in any analysis of bank liquidity is the estimation of liquidity needs.

Answer 2

True

Question 3

The sources and uses of funds method is used to measure asset liquidity.

Answer 3

False

Question 4

The structure-of-deposits method focuses on the different types of deposits of the bank and the probability of withdrawal of each of these types within a specific planning horizon.

Question 5

Historically, liability management was the primary means by which banks met cash demands.

Question 6

Liquid assets not only serve as an alternative source of funds for banks but they are used as a reserve to meet unexpected cash needs.

Question 7

Primary reserves are comprised of cash and near money financial instruments.

Question 8

Most banks hold cash reserves well in excess of legal reserve requirements.

Question 9

Uniform legal reserve requirements for all U.S. banks was implemented under the Garn-St. Germain Act of 1982.

Question 10

In lagged reserve requirement accounting the transactions computation period begins three days before the maintenance period.

Question 11

Managing the money position refers to minimizing holdings of money market instruments.

Question 12

To meet reserve requirements banks can use Federal Reserve deposits and vault cash.

Question 13

Today, there is no reserve requirement on nonpersonal time deposits.

Question 14

Federal funds and the discount window are the most likely external sources of funds that bank use to meet reserve requirements.

Question 15

Secondary reserves and the money market approach are closely related to one another.

Question 16

If the level of interest rates is high, an aggressive liquidity approach would entail purchasing short-term securities.

Question 17

If a bank securitizes some loans and sells the securities without recourse to investors, the ban is liable to these investors for any losses that they may experience on the securities.

Question 18

A key advantage of liability management is that assets can be shifted from money market assets to loans and longer-term securities.

Question 19

Financial risk increases the variability of earnings per share.

Question 20

A funds management approach focuses primarily on liability management.

Question 21

Optimum liquidity balances costs of too much or too little liquidity.

Question 22

Regulators are concerned with the least cost liquidity strategy for a bank.

Question 23

A problem situation that threatens a bank's solvency is related most closely wit operational liquidity.

Question 24

Which of the following has caused banks difficulty in estimating liquidity needs?

A) competition for loans from other financial institutions
B) deregulation of interest rate ceilings on deposits
C) competition for loans from nonfinancial institutions
D) a and b
E) a, b, and c

Question 25

The two approaches to meeting potential liquidity requirements are:

A) short-term and long-term liquidity
B) corporate stock and bond portfolios
C) asset liquidity and liability management
D) CD's and deposits

Question 26

Estimating liquidity needs involves:

A) forecasting the level of future loan commitments and deposits
B) establishing a liquidity budget
C) forecasting interest rate levels
D) a and c
E) a, b, and c

Question 27

The federal reserve requirement for transactions deposits over a minimum cutoff level such as $46.5 million is:

A) 3%
B) 10%
C) 12%
D) none of the above

Question 28

Which of the following money market instruments arises from international trade?

A) agency securities
B) bankers' acceptances
C) repurchase agreements
D) fed funds

Question 29

Which of the following is a source of funds?

A) increases in loans and decreases in deposits
B) decreases in loans and increases in deposits
C) increases in loans and increases in deposits
D) decreases in loans and decreases in deposits

Question 30

The major strength of the structure-of-deposits method is:

A) it centers management attention on one of the most likely causes of liquidity pressures
B) it ignores other liquidity demands
C) it categorizes loan demands according to stability
D) it assigns a probability of withdrawal to each nondeposit source of funds

Question 31

Asset management includes:

A) using money market instruments to cover liquidity
B) using cash reserves to cover liquidity
C) borrowing fed funds to cover liquidity
D) a and b
E) a, b, and c

Question 32

Most primary reserves are:

A) cash assets
B) fed funds
C) primary; secondary
D) money market
E) a and c

Question 33

Use of liability management ________ bank size and so requires appropriate ________ in capital reserves.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Question 34

The extent to which legal reserves exceed cash that would normally be held by banks without these requirements is a form of:

A) asset management
B) liability management
C) liquidity management
D) taxation
E) none of the above

Question 35

Regulation D of DIDMCA 1980 did all of the following EXCEPT:

A) required all depository institutions to carry legal reserves
B) changed Fed accounting procedures for reserves on transactions balances from contemporaneous to lagged
C) eliminated incentives for member banks to leave the system
D) facilitated monetary control

Question 36

Under lagged reserve requirement accounting all of the following are true EXCEPT:

A) the transactions computation period comes before the maintenance period
B) there is a 17-day lag between the end of the transactions computational period and the beginning of the maintenance period
C) the vault cash computational period is 14 days long
D) LRR rules apply only to nontransactions accounts

Question 37

Collateralized commercial paper is issued by:

A) banks
B) Federal agencies
C) special purpose corporations
D) private corporations

Question 38

If a bank has a deficiency of reserves, the Federal Reserve would allow it to use:

A) fed funds
B) the discount window
C) bankers' acceptance
D) none of the above

Question 39

Managing the money position of a bank relates to:

A) maximizing cash holdings
B) minimizing cash holdings
C) minimizing reserves held with the Fed
D) maximizing return on investment

Question 40

Which of the following is NOT a category of deposits?

A) transaction accounts
B) nonpersonal time accounts
C) repurchase agreements
D) Eurocurrency liabilities

Question 41

If a bank has a deficiency of funds, the most likely source of funds to make up this deficiency is:

A) cash reserves
B) fed funds market
C) money market securities
D) increased deposits

Question 42

Money market instruments include all of the following EXCEPT:

A) repurchase agreements
B) negotiable certificates of deposit
C) fed funds
D) commercial paper
E) none of the above; they are all money market instruments

Question 43

The money market approach to liquidity management involves:

A) selling money market instruments to increase liquidity
B) buying money market instruments to increase liquidity
C) matching asset maturities with specific future liquidity needs
D) using money market instruments to cover reserve requirements

Question 44

The money market approach to liquidity management results in all of the following EXCEPT:

A) avoids securities transactions costs
B) helps maintain capital reserves
C) avoids price risk
D) provides interest revenues

Question 45

The primary advantage(s) of liability management include:

A) assets can be shifted from lower earning money market instruments to higher earning loans and longer-term securities
B) increased risk
C) greater asset diversification is possible
D) a and c
E) a, b, and c

Question 46

Liability management increases a bank's _________ risk and _________ risk.

A) interest rate; price
B) liquidity; financial
C) interest rate; financial
D) price; interest rate

Question 47

The quantity of deposit and nondeposit funds in a bank depends on all of the following EXCEPT:

A) the Fed's monetary policy actions
B) the bank's financial strength
C) economic conditions
D) none of the above; they all affect the quantity of deposit and nondeposit funds

Question 48

Funds management involves:

A) combining long-term bonds and short-term money market assets
B) combining asset liquidity and liability managment
C) comparing total liquidity needs with total liquidity sources
D) b and c
E) a, b, and c

Question 49

All of the following are common ratio measures of bank liquidity EXCEPT:

A) loans/deposits
B) loans/nondeposit liabilities
C) unencumbered liquid assets/nondeposit liabilities
D) fixed assets/loans

Question 50

The best approach to measuring liquidity takes into account changes over time in both liquidity needs and sources. A financial ratio that does this consists of _________ in period t over _________ in period t.

A) liquid assets and liabilities; estimated liquidity needs
B) liquid assets; estimated liabilities
C) estimated reserve needs; liquid assets and liabilities
D) liabilities; estimated liquid assets

Question 51

In optimal liquidity management decisions, there is a trade off between __________ and __________.

A) long-term liquidity; short-term liquidity
B) primary reserves; secondary reserves
C) the cost of maintaining liquidity; the cost of insufficient liquidity
D) price risk; interest rate risk

Question 52

Which of the following is NOT a criterion for evaluating bank liquidity used by regulators?

A) availability of assets readily converted into cash
B) the diversity of the bank's money market assets
C) the bank's formal and informal commitments for future lending or investments
D) structure and volatility of deposits
E) reliance on interest sensitive funds

Question 53

Liquidity practice in normal everyday operations is known as:

A) crisis liquidity management
B) liability liquidity management
C) operational liquidity management
D) routine liquidity management
E) asset liquidity management

Question 54

Medium-term notes normally have a maturity equal to:

A) 1 year
B) 5 years
C) 20 years
D) all of the above are possible

Question 55

Medium-term notes have the advantage(s) of:

A) no underwriter needed
B) lower price risk during issuance
C) terms tailored to demands of investors
D) all of the above

Question 56

The government policy of preventing failures of very large banks is known as:

A) lender of last resort
B) too-big-to-fail
C) run contagion
D) none of the above

Question 57

Volatile liabilities in the UBPR include all of the following EXCEPT:

A) checking accounts
B) large CDs
C) purchased deposits
D) nondeposit sources of funds

Question 58

If the loans/deposits ratio is relatively high for a bank, this implies an emphasis on:

A) securities to finance loans
B) nondeposit sources of funds to finance loans
C) decreasing the quantity of loans outstanding
D) decreasing excess cash reserves