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

Question

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Managing liabilities, such as deposits, can help banks or financial institutions manage their liquidity risk. However, offering lower funding costs may attract more depositors, which in turn increases the risk of a sudden withdrawal of funds. Therefore, managing liabilities involves balancing the need for lower costs with the risk of higher withdrawals.

Managing Liabilities as a Means of Managing Liquidity Risk Involves