If purchased liquidity is used by a DI to fund an exercised loan commitment
A)the balance sheet will decrease by the amount of the new loan.
B)only the asset side of the balance sheet will increase.
C)the balance sheet will increase by the amount of the new loan.
D)only the liability side of the balance sheet will increase.
E)there will be no effect on the balance sheet.

Question

Quizplus · Accepted Answer

When purchased liquidity is used to fund an exercised loan commitment, it means the DI is using funds from a source outside the bank to fund the loan. This results in an increase in the DI's liabilities (from the purchased liquidity) and an increase in assets (from the loan), leading to an increase in the balance sheet by the amount of the new loan.

If Purchased Liquidity Is Used by a DI to Fund