18-69 Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash,T-bills,and T-bonds to reduce liquidity risk?

Question

Quizplus · Accepted Answer

Cash, T-bills, and T-bonds offer low returns compared to other assets, such as corporate bonds, stocks, or real estate. Therefore, if an FI invests a large amount of its assets in these low-returning assets, it may face a return or interest earnings penalty compared to FIs that invest in higher-returning assets. This is because the FI is forgoing potentially higher returns to hold highly liquid assets, which are less risky but offer lower returns.

18-69 Why Do FIs Face a Return or Interest Earnings