Question 1

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

Accepted Answer

An asset conversion liquidity management strategy involves transforming illiquid assets into cash or highly liquid assets. This strategy prioritizes selling off assets with the least profit potential first, which makes choice A the correct answer. Liability management strategies focus on managing the bank's liabilities and funding sources, while availability strategies ensure the availability of cash or highly liquid assets to meet immediate needs. Funds source strategies are concerned with managing the sources of funds used to finance the bank's assets.

Question 2

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

Accepted Answer

Dividend payments to stockholders are not a source of liquidity for financial institutions as they involve a cash outflow from the institution, reducing its liquidity. The other options- deposits, money market borrowings, and sale of marketable securities- provide inflows of cash for financial institutions, increasing their liquidity. Therefore, option D is the correct answer.

Question 3

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

Accepted Answer

The risk that liquid funds will not be available when needed is known as availability risk. Market risk is the risk of losses due to changes in market conditions, price risk is the risk of losses due to changes in market prices, and interest-rate risk is the risk of losses due to changes in interest rates. None of these risks specifically address the concern of whether or not liquid funds will be available.

Question 4

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

Accepted Answer

Balanced liquidity management involves managing both assets and liabilities to ensure sufficient liquidity while minimizing costs and risks associated with borrowing and storing liquid assets.

Question 5

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:

Accepted Answer

The size of risk premiums on CDs the bank issues is an indicator of the market's perception of the bank's liquidity position. If risk premiums are high, it suggests that the market views the bank as facing potential liquidity issues, while low premiums indicate the market perceives the bank as being in a strong liquidity position. Return on equity capital and return on assets are indicators of profitability, while the volume of bank stock outstanding is an indicator of demand for the bank's stock, but neither directly relate to liquidity.

Question 6

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:

Accepted Answer

The approach described in the question, where some of the expected demand for liquidity is stored in assets and unexpected cash needs are met from near-term borrowings, is known as balanced liquidity management. This approach seeks to balance the costs and benefits of holding liquid assets versus borrowing to meet unexpected needs, in order to maintain an appropriate level of liquidity while minimizing costs. Liability management and asset conversion refer to different approaches to managing the composition of a bank's balance sheet, while borrowed liquidity management is not a commonly used term in the field of finance.

Question 7

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:

Accepted Answer

The term "liquid" refers to the ability of a financial institution to easily convert assets into cash without encountering significant loss. Having ready access to immediately spendable funds is considered liquid, which is desirable because it allows the institution to meet its financial obligations in a timely manner.

Question 8

Sources of liquidity for banks include:

Accepted Answer

All of the options mentioned are sources of liquidity for banks. Deposits are the primary source of funding for banks, and money market borrowings allow banks to borrow short-term funds from other financial institutions. The sale of marketable securities provides banks with cash, and repayments of loans disbursed also provide liquidity to banks. Therefore, all of the options are correct.

Question 9

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

Accepted Answer

Banks face a trade-off between liquidity and profitability because holding more liquid assets typically results in lower returns, while less liquid assets can generate higher profits.

Question 10

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.

Accepted Answer

The statement accurately defines the loan commitments ratio.

Question 11

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

Accepted Answer

Banks need liquidity to meet credit requests from customers they wish to retain, as maintaining good customer relationships is crucial for their business.

Question 12

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:

Accepted Answer

The net liquidity position is calculated by summing all inflows and subtracting all outflows. Inflows: $30M (deposits) + $15M (nondeposit services) + $25M (loan repayments) + $5M (sale of assets) + $45M (borrowings) = $120M. Outflows: $20M (withdrawals) + $10M (borrowings repayments) + $5M (operating expenses) + $10M (dividends) + $60M (loan requests) = $105M. Net liquidity position = $120M - $105M = $15M surplus.

Question 13

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

Accepted Answer

A money position manager is responsible for overseeing an institution's legal reserve account, ensuring that the institution meets its reserve requirements.

Question 14

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

Accepted Answer

A positive liquidity gap means that the bank has more sources of liquidity than it needs to cover its uses of liquidity. This is a desirable situation, as it provides a buffer for unexpected cash outflows or unforeseen circumstances. Banks with positive liquidity gaps are generally considered to be more stable and less risky than those with negative liquidity gaps, as they are better positioned to meet their obligations and maintain their operations even during periods of stress or volatility.

Question 15

Financial institutions face significant liquidity problems because of:

Accepted Answer

Financial institutions often face liquidity problems due to imbalances between the maturities of their assets and liabilities, a high proportion of liabilities subject to immediate withdrawal, and the sensitivity of their business to changes in interest rates. All these factors can strain their liquidity.

Question 16

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

Accepted Answer

A customer withdrawing money from their account is an example of a use of funds for the bank, as it reduces the bank's cash reserves.

Question 17

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

Accepted Answer

The "structure of funds approach" categorizes funds into core deposits, hot money, and vulnerable money to assess a bank's liquidity needs.

Question 18

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

Accepted Answer

When a borrower repays a loan, the bank receives funds which can then be used for other purposes, making it a source of funds.

Option A is not a source of funds for the bank, but rather a withdrawal of funds by a customer.

Option C is an increase in the bank's liability to the Federal Reserve, so it is not a source of funds.

Option D is an investment made by the bank, not a source of funds.

Option E is not the correct answer as there is at least one option that is a source of funds.

Question 19

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

Accepted Answer

All of the options listed influence a bank's choice among various sources of reserves. The immediacy of the need and duration of the need will affect whether the bank chooses to use the discount window or borrow from other banks. The interest rate outlook will affect whether the bank chooses to hold excess reserves or borrow from other sources. Regulations will affect the availability and cost of borrowing from different sources as well.

Question 20

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

Accepted Answer

Holding liquid assets is primarily for meeting immediate currency demands, maintaining required reserves, compensating for correspondent banking services, and facilitating the check clearing process. Meeting capital requirements, however, is more about maintaining a certain level of equity or assets relative to liabilities, rather than liquidity management.

Quiz 11: Liquidity and Reserves Management: Strategies and Policies

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