The First State Bank of Summerville knows that,if it issues a large amount of the negotiable CD,the interest cost on the CD may be very high due to tight money supply conditions.As a result,it chooses to ration the credit and lend only to its most loyal clients.What risk factor that affects a bank's use of nondeposit sources of funds is the concern here?

Question

Quizplus · Accepted Answer

The concern of the First State Bank of Summerville about rationing credit and lending only to its most loyal clients indicates that the risk factor here is credit availability. This means that the bank is concerned about the availability of nondeposit sources of funds since it knows that issuing a large amount of negotiable CDs may result in high interest costs due to tight money supply conditions. Therefore, to minimize the risk of not being able to access nondeposit sources of funds when needed, the bank decides to lend only to its most loyal clients.

The First State Bank of Summerville Knows That,if It Issues