If a bank switches the mix of its assets to a larger percentage of short-term securities and a smaller percentage of loans, which of the following answer(s) are correct?

Question

Quizplus · Accepted Answer

By increasing the proportion of short-term securities and reducing the proportion of loans, a bank enhances its liquidity since short-term securities are more liquid than loans. This shift typically results in lower asset utilization because loans usually generate higher returns than short-term securities. Consequently, the bank is likely to experience lower interest revenues from the shift towards assets that generally yield lower returns.

If a Bank Switches the Mix of Its Assets to a Larger