Question 1

A liquid asset can be converted to cash quickly, but will require a discount from market value.

Accepted Answer

A liquid asset can be converted to cash quickly without a significant discount from its market value.

Question 2

Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.

Accepted Answer

Under contemporaneous reserve accounting, banks must maintain reserves based on their transaction accounts over a two-week reserve maintenance period, not a seven-day period.

Question 3

Holding small amounts of liquid assets could cause an FI to be unable to meet the claims of liability holders.

Accepted Answer

Holding small amounts of liquid assets can lead to a situation where an FI may not have enough funds to meet the claims of its liability holders in case they demand repayment. This could potentially lead to liquidity problems for the FI.

Question 4

The minimum average daily reserves required in a maintenance period is a percentage of the daily average demand deposits held by a bank during the computation period.

Accepted Answer

This is true based on the reserve requirement regulations set by the Federal Reserve for banks in the United States. The percentage varies depending on the size of the bank and the types of deposits they hold.

Question 5

By definition, all transaction accounts at U.S. FIs allow account holders to make unlimited withdrawals.

Accepted Answer

Transaction accounts at U.S. financial institutions typically allow for withdrawals and deposits, but not all of them offer unlimited withdrawals without restrictions or potential fees.

Question 6

Excessive illiquidity can result in an FI's inability to meet required payments on liability claims and, at the extreme, in insolvency.

Accepted Answer

Excessive illiquidity can lead to an FI being unable to meet its liability claims and ultimately can result in insolvency.

Question 7

In most countries, regulators often set minimum liquid reserve requirements on FIs.

Accepted Answer

This is true as minimum liquid reserve requirements help ensure that FIs have enough cash or liquid assets on hand to meet potential cash outflows or unexpected events. Regulators set these requirements as a form of risk management and to promote the stability of the financial system.

Question 8

One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.

Accepted Answer

Efficiently managing liquid asset positions allows an FI to have sufficient cash and other highly liquid assets available to meet any unexpected withdrawal demands from depositors or investors, reducing the risk of a liquidity crisis.

Question 9

In most countries, assets used to satisfy the liquid assets ratio may include liquid government securities.

Accepted Answer

In most countries, liquid government securities are considered as eligible assets to satisfy the liquid assets ratio requirement. However, the specific list of acceptable assets may vary depending on the country and its banking regulations.

Question 10

A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.

Accepted Answer

The answer of A strategy to increase reservable deposits on...

Question 11

The reserve computation period for determining required reserves covers the 14 days of a two-week period that runs from Monday to Monday.

Accepted Answer

The reserve computation period typically covers a two-week period that runs from Tuesday to Monday, not Monday to Monday.

Question 12

Regulators in the U.S. do not allow government securities to perform the role of a required reserve.

Accepted Answer

Regulators in the U.S. do allow government securities to count towards banks' required reserves. Banks can use government securities as part of their reserves to meet regulatory requirements.

Question 13

One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.

Accepted Answer

The primary reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their assets, not their liabilities. Their liabilities, in fact, are often more liquid since depositors and policyholders may demand their funds on short notice.

Question 14

In the U.S., excess reserves held at the central bank pay interest to the DI.

Accepted Answer

Excess reserves held at the central bank in the U.S. do pay interest to the Depository Institutions (DI). The interest rate on excess reserves is set by the central bank and serves as another tool for monetary policy implementation.

Question 15

To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.

Accepted Answer

By managing the liability structure, an FI can match the maturities and cash flows of its assets and liabilities, thereby reducing liquidity risk. This includes monitoring the sources and timing of cash inflows and outflows and maintaining an appropriate level of liquid assets to meet obligations.

Question 16

Managing a bank's reserve position requires knowing only the target reserve ratio and the period over which reserves must be maintained.

Accepted Answer

Managing a bank's reserve position requires taking into account factors such as deposits, withdrawals, and changes in the economy. It is not as simple as just knowing the target reserve ratio and the maintenance period.

Question 17

In the U.S., banks can hold cash and government securities to meet reserve requirements.

Accepted Answer

The answer of In the U.S., banks can hold cash...

Question 18

A strategy to lower deposits on Fridays can lower reserve requirements for a bank.

Accepted Answer

If a bank can implement a strategy to lower deposits on Fridays, it can bring down the amount of reserves required by the Federal Reserve. This can result in cost-savings for the bank, as they may not have to hold as much money in reserve as before.

Question 19

In the U.S., cash reserves necessary to meet deposit reserve requirements typically include vault cash and cash deposits at the Federal Reserve Bank.

Accepted Answer

Cash reserves necessary to meet deposit reserve requirements in the U.S. typically include vault cash and cash deposits at the Federal Reserve Bank. This is required by the Federal Reserve's monetary policy to ensure stability in the banking system.

Question 20

The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.

Accepted Answer

Minimum required reserves set by regulators require FIs to hold a portion of their deposits in reserve with the central bank, which cannot be used to earn interest or lend to customers. This acts as a form of tax on FIs, as they lose potential profits on these funds.

Quiz 18: Liability and Liquidity Management