Deck 18: Liability and Liquidity Management

Question 1

Savings accounts are less liquid than demand deposit accounts.

Answer 1

True

Question 2

To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.

Answer 2

True

Question 3

Demand deposits are a costless source of funds and have a high degree of withdrawal risk.

Answer 3

False

Question 4

Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.

Question 5

Deposits with low withdrawal risk typically are the lowest cost deposits for a DI.

Question 6

One reason FIs such as deposit-taking institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.

Question 7

One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.

Question 8

A liquid asset can be converted to cash quickly, but will require a discount from market value.

Question 9

In most countries, assets used to satisfy the liquid assets ratio may include liquid government securities.

Question 10

Because retail GICs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

Question 11

If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services, the bank receives a subsidy or implicit interest payment.

Question 12

In many countries, regulators often set minimum liquid reserve requirements on FIs.

Question 13

Savings accounts normally receive a lower interest rate than chequing accounts.

Question 14

Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

Question 15

Excessive illiquidity can result in an FI's inability to meet required payments on liability claims and, at the extreme, in insolvency.

Question 16

Excessive amounts of liquid asset holdings can penalize the earnings of a DTI.

Question 17

Holding small amounts of liquid assets could cause an FI to be unable to meet the claims of liability holders.

Question 18

In the U.S. excess reserves held at the central bank pay interest to the DTI.

Question 19

Funding costs generally are positively related to the period of time the liability remains on the balance sheet.

Question 20

The interest rate paid deposit accounts by Canadian DTIs must directly reflect the rates earned on investments in commercial paper, bankers acceptances, repurchase agreement, and T-bills.

Question 21

Because investment banks typically buy and sell securities on a regular basis; they have no need for a liability management plan.

Question 22

Recently banks have changed the liability structure towards instruments that have less withdrawal risk and higher explicit interest costs.

Question 23

Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.

Question 24

Property & casualty insurance companies typically have greater liquidity risk than life insurance companies.

Question 25

Which of the following is considered to be the most liquid asset?

A)T-notes.
B)T-bills.
C)Cash.
D)T-bonds.
E)Wholesale GICs.

Question 26

Which of the following is an outcome of a decrease in the reserve requirement ratio?

A)DTIs must hold more reserves against the transaction accounts on their balance sheets.
B)DTIs are able to lend a smaller percentage of their deposits.
C)Decreased credit availability in the economy.
D)A multiple contraction in deposits and a decrease in the money supply.
E)A multiplier effect on the supply of DTI deposits and thus, the money supply.

Question 27

A DI offers a $500 minimum balance account paying 5.5 percent annual interest. The account has a service charge of $0.05 per cheque, and processing costs per cheque are $0.15. The customer maintains a balance of $1,000, and averages 150 cheques per year. What is the annual gross interest return on this account to the customer?

A)$22.50.
B)$70.00.
C)$15.00.
D)$55.00.
E)$7.50.

Question 28

The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

A)penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk.
B)benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk.
C)lead to increased withdrawals by depositors that do not meet the minimum requirement.
D)assist the FI manager by providing an optimal target amount of cash that will exactly match withdrawal expectations.
E)None of these.

Question 29

Property & casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage across different types of disasters.

Question 30

Because of penalties imposed for early withdrawal, a GIC depositor is unlikely to withdrawal the GIC funds from the bank before maturity.

Question 31

Which of the following is an outcome of an increase in the reserve requirement ratio?

A)DTIs may hold fewer reserves against their transaction accounts.
B)DTIs are able to lend out a greater percentage of their deposits.
C)Increased credit availability in the economy.
D)DTIs are only able to lend a smaller percentage of their deposits than before.
E)A multiplier effect on the supply of DTI deposits and thus the money supply.

Question 32

Which of the following observations is NOT true of a liquid asset?

A)It can be turned into cash quickly.
B)Conversion to cash entails low transaction costs.
C)Conversion to cash happens with little or no loss in principal value.
D)It is traded in an active market.
E)Large transactions may move its market price substantially.

Question 33

The increased securitization of bank loans has reduced the liquidity of bank assets.

Question 34

Most large Canadian banks directly issue commercial paper to meet their liquidity needs.

Question 35

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk?

A)These assets carry a reserve requirement tax.
B)These assets offer low returns.
C)These assets offer higher returns that reflect their risk.
D)Inflation increases the purchasing power value of these assets.
E)All of these.

Question 36

Reliance on purchased or borrowed funds will largely eliminate the liquidity risk faced by a bank.

Question 37

What is the average implicit interest rate on a $100,000 account if the bank's average management costs are $2,500 and annual fees average $1,750?

A)4.25 percent.
B)2.50 percent.
C)1.75 percent.
D)0.75 percent.
E)-0.75 percent.

Question 38

An FI offers a $2,500 minimum balance chequing account paying 4 percent annual interest, and there are no service charges as long as the customer maintains the minimum balance. The customer maintains a balance of $5,000, and averages 750 cheques per year. Each cheque has a processing cost to the FI of $0.15. What is the annual gross interest return on this account to the customer?

A)$112.50.
B)$100.00.
C)$312.50.
D)$137.50.
E)$212.50.