Deck 11: Liquidity and Reserves Management: Strategies and Policies

Question 1

Many depository institutions hold __________ balances (extra reserves)to help prevent overdraft penalties.

Answer 1

precautionary

Question 2

A(n)_________________________ is the person in a bank,responsible for the bank's cash position and meeting legal reserve requirements.

Answer 2

money position manager

Question 3

In the _____________ approach to managing liquidity,deposits and other sources of funds are divided into categories and,then liquidity managers must set aside liquid funds according to some desired operating rule.

Answer 3

structure of funds

Question 4

_________________________ is the availability of cash in the amount needed at a reasonable cost.

Question 5

When a financial institution sells assets to manage liquidity,it faces ________________________.It loses future earnings on those assets,incurs transaction costs on those sales,and the assets most easily sold often have the lowest return.

Question 6

A _________________________ is the difference between an institution's sources and uses of funds.

Question 7

A(n)__________________ is an asset which can be converted into cash easily,which has a relatively stable price,and is reversible so that the sellers can recover their original investment with little risk of loss.

Question 8

The oldest approach to meeting liquidity needs,which relies on the sale of liquid assets to meet liquidity demands is called ________________________.

Question 9

A(n)_________________________ is an account many banks hold at the Federal Reserve to cover any checks drawn against the bank.

Question 10

The method used in the U.S.to determine a bank's legal reserve requirement,in which the period for holding legal reserves follows the period used to calculate the required amount of legal reserves,is called ________________________.

Question 11

_________________________ are the deposits and other borrowings of a bank which are very interest sensitive or the ones bank is sure will be withdrawn during the current period.

Question 12

_________________________ are the assets a bank must,by law,hold behind its deposits.In the U.S. ,only vault cash and deposits held with the Federal Reserves can be used to meet these requirements.

Question 13

For several decades,the largest banks around the world have chosen _____________,which calls for borrowing immediately spendable funds to cover all anticipated demands for liquidity.

Question 14

Under a _________________________ strategy,some of the expected demands for liquidity are stored in assets,while others are backstopped by arrangements for lines of credit from banks or other suppliers of funds.

Question 15

Not all _____________ banks around the world have reserve requirements.

Question 16

The fed funds rate is generally most volatile on a bank's __________ day.

Question 17

A(n)_________________________ is a service developed by banks where a bank shifts money overnight out of accounts with reserve requirements into savings accounts and other similar accounts with no reserve requirements

Question 18

_________________________ is a strategy in which a financial institution borrows in the money market to meet its liquidity needs.

Question 19

The ________________ approach to managing liquidity starts with two simple facts,liquidity rises as deposits increase and loans decrease,and liquidity falls when deposits fall and loans increase.

Question 20

_________________________ is a 14 day period stretching from a Thursday to a Wednesday.This is the period in which a bank has to keep its average daily level of required reserves for a particular computation period with the Federal Reserve bank in the region.

Question 21

Many financial service institutions estimate their liquidity needs based upon experience and industry averages.This approach to managing liquidity is called the ____________ approach.

Question 22

Borrowed liquidity (liability)management is less risky for a financial institution than is asset conversion.

Question 23

Liquid assets generally have a stable price but are not necessarily reversible.

Question 24

Asset conversion is considered to be a costless approach to liquidity management.

Question 25

Volume of legal reserves held at the Federal Reserve by depository institutions has declined sharply in recent years.

Question 26

Many analysts believe there is only one ultimate sound method for assessing a financial institution's liquidity needs.This method centers on ___________.

Question 27

The Federal Reserve has been lowering deposit reserve requirements in recent years.

Question 28

If total legal reserves held are less than required reserves,a bank has ___________.

Question 29

The daily average amount of deposits and other reservable liabilities are computed using information gathered over a two-week period extending from a Tuesday to a Monday two weeks later.This interval is known as ___________.

Question 30

Most liquidity problems in banking arise from inside a bank,not from its customers.

Question 31

The ____________ is where a money position manager can cover a large reserve deficit quickly.It is usually one of the cheapest places to borrow but is also frequently volatile.

Question 32

Asset liquidity management (asset conversion)involves storing liquidity in assets,such as land and buildings.

Question 33

Liquid assets must have a reasonably stable price so that the market is deep enough to absorb the sale without a significant loss of value.

Question 34

One principle of sound bank liquidity management is to be sure to first sell those assets which have least profit potential.

Question 35

A U.S.bank can run up to a 5-percent deficit in its legal reserve requirement unconditionally without incurring an interest penalty from the Federal Reserve System.

Question 36

According to the textbook,the management of a bank expects to lose its "hot money" liabilities during a period.

Question 37

One of the ratios used in the liquidity indicator approach to managing a financial institution's liquidity needs is ___________.This ratio is cash and deposits due from depository institutions divided by total assets,where a greater ratio indicates a stronger liquidity position.

Question 38

Asset liquidity management (asset conversion)involves storing liquidity in assets,such as cash and marketable securities.

Question 39

A financial institution's liquidity gap represents the difference between its sources and uses of liquid funds.

Question 40

If total legal reserves held are greater than required reserves,a bank has ____________.

Question 41

All central banks impose reserve requirements on the banks they regulate.

Question 42

Some central banks around the world impose reserve requirements on bank loans.

Question 43

All central banks around the world have some specified reserve requirement.

Question 44

Discount window loans jumped dramatically the day following 9/11.

Question 45

If a bank in the United States runs a legal reserve deficit of more than 2 percent of its required daily average legal reserve position,it will be assessed an interest penalty equal to the Federal Reserve's discount rate plus 5 percent.

Question 46

One of the problems with liquidity management for a bank is that there is a trade-off between liquidity and profitability.

Question 47

The liquidity problem for banks is made easier because most of their liabilities are not subject to immediate repayment.

Question 48

The oldest approach to liquidity management is the asset liquidity management approach.

Question 49

A bank or financial service institution can meet reserve requirements by selling Treasury securities in its portfolio.

Question 50

Robberies of cash from banks have declined in recent years.

Question 51

One of the problems with liquidity management for a bank is that rarely does the demand for funds equals the supply of funds at a given time.

Question 52

The liquidity problem for banks is made easier because depositors and borrowers are not sensitive to changing interest rates.

Question 53

The sources and uses of funds method of estimating a bank's liquidity requirements divides the bank's liabilities into three categories-hot money,vulnerable funds,and stable funds-and estimates the probability of each being withdrawn from the bank.

Question 54

According to the textbook,if a bank's liquidity deficit is expected to last for only a few hours,the Federal funds market or the central bank's discount window is normally the preferred source of funds.

Question 55

According to the textbook,banks making heavy use of borrowed sources of liquidity must wrestle with the problem of interest cost uncertainty.

Question 56

Interest in banks' and financial service institutions' liquidity management is a relatively new phenomenon which arose following the 9/11 crisis.

Question 57

A bank's money position manager is responsible for ensuring that the bank maintains an adequate level of legal reserves.

Question 58

The liquidity indicator,core deposits divided by total assets,is a measure of stored liquidity.

Question 59

Core deposit ratio is used as one of the liquidity indicators for depository institutions and is defined as ratio of the core deposits to total assets.

Question 60

If a bank receives more checks deposited to the accounts it holds than checks drawn against its deposit accounts,the bank's legal reserves will tend to increase.

Question 61

A bank following a(n)_________________________ liquidity management strategy must take care that assets with the least profit potential are sold first.

A)asset conversion
B)liability management
C)availability
D)funds source
E)None of the options is correct

Question 62

Which of the following is not a source of liquidity for financial institutions?

A)Deposits
B)Money market borrowings
C)Sale of marketable securities
D)Dividend payments to stockholders
E)All the options are correct.

Question 63

The risk that liquid funds will not be available in the volume needed by a bank is often called:

A)market risk.
B)price risk.
C)availability risk.
D)interest-rate risk.
E)None of the options is correct.

Question 64

Due to the inherent risks in relying on borrowed liquidity and costs of storing liquid assets,most financial firms compromise by using:

A)asset management.
B)liability management.
C)balanced liquidity management.
D)asset and liability management.
E)All the options are correct.

Question 65

If a bank's management uses "the discipline of the financial marketplace" to gauge its liquidity position,one of the indicators of this market test of adequacy of a bank's liquidity position is:

A)the bank's return on equity capital.
B)the volume of bank stock outstanding.
C)the bank's return on assets.
D)the size of risk premiums on CDs the bank issues.
E)None of the options is correct.

Question 66

When some of a bank's expected demand for liquidity are stored in its assets,while other unexpected cash needs are met from near-term borrowings,the approach to liquidity management is known as:

A)liability management.
B)asset conversion.
C)borrowed liquidity management.
D)balanced liquidity management.
E)None of the options is correct

Question 67

A financial institution that has ready access to immediately spendable funds at reasonable cost and at precisely the time those funds are needed is considered:

A)risk-free.
B)liquid.
C)efficient.
D)profitable.
E)None of the options is correct.

Question 68

Sources of liquidity for banks include:

A)deposit inflows.
B)money market borrowings.
C)sale of marketable securities.
D)repayments of loans disbursed.
E)All of the options are correct.

Question 69

For a bank,there is always a trade-off problem between liquidity and:

A)risk exposure.
B)revenue generation.
C)profitability.
D)efficiency.
E)None of the options is correct.

Question 70

Loan commitments ratio measures the volume of promises a lender has made to its customers to provide credit up to pre-specified amount over a given time period.

Question 71

The two most pressing demands for liquidity from a bank come from,first,customers withdrawing their deposits and,second,from:

A)credit requests from customers the bank wishes to keep.
B)checks being cashed at local stores and directly from the bank.
C)demands for wired funds from correspondent banks.
D)legal reserve requirements set by the Federal Reserve Board.
E)None of the options is correct.

Question 72

In the week about to begin,a bank expects $30 million in incoming deposits,$20 million in deposit withdrawals,$15 million in revenues from the sale of nondeposit services,$25 million in customer loan repayments,$5 million in sale of bank assets,$45 million in money market borrowings,$60 million in acceptable loan requests,$10 million in repayments of bank borrowings,$5 million in cash outflows to cover other operating expenses,and $10 million in dividend payments to its stockholders.The bank's net liquidity position for the week is expected to be:

A)$30 million surplus.
B)$20 million deficit.
C)$10 million deficit.
D)$15 million surplus.
E)None of the options is correct.

Question 73

A person responsible for overseeing an institution's legal reserve account is called:

A)reserve manager.
B)money market manager.
C)money position manager.
D)legal counselor.
E)None of the options is correct.

Question 74

When a bank's sources of liquidity exceed it uses of liquidity,the bank will have a:

A)positive liquidity gap.
B)negative liquidity gap.
C)cyclical liquidity gap.
D)seasonal liquidity gap.
E)None of the options is correct.

Question 75

Financial institutions face significant liquidity problems because of:

A)imbalances between the maturities of their assets and liabilities.
B)their high proportion of liabilities subject to immediate withdrawal.
C)the sensitivity of their business to changes in interest rates.
D)imbalances between the maturities of their assets and liabilities and their high proportion of liabilities subject to immediate withdrawal.
E)All of the answer options are correct.

Question 76

Which of the following is an example of a use of funds?

A)A customer withdraws $1,000 from their account
B)A borrower repays $1,500 of a loan they have received
C)A bank issues a $1,000,000 CD
D)A bank sells $5,000,000 of T-Bills
E)None of the options is a use of funds

Question 77

"Core deposits","hot money",and "vulnerable money" are categories of funds under which of the following methods of estimating a bank's liquidity needs?

A)Sources and uses of funds approach
B)Structure of funds approach
C)Liquidity indicator approach
D)Sources and uses of funds approach and liquidity indicator approach
E)None of the options is correct

Question 78

Which of the following is an example of a source of funds?

A)A customer withdraws $1,000 from his account
B)A borrower repays $1,500 of a loan he had taken
C)A bank increases its Fed funds sold account by $1,000,000
D)A bank purchases $5,000,000 in T-Bills
E)None of the options is a source of funds

Question 79

Factors that influence a bank's choice among the various sources of reserves include which of the following?

A)Immediacy of the need
B)Duration of the need
C)Interest rate outlook
D)Regulations
E)All of the options are correct

Question 80

Which of the following is not a reason for banks to hold liquid assets?

A)To meet customers' needs for currency
B)To meet capital requirements
C)To meet required reserves
D)To compensate for correspondent bank services
E)To assist in the check clearing process