Chapter 12

Question 1

Explain FIs and liquidity risk exposures (high, moderate, low)

Answer 1

High: banks
Moderate: life insurance
Low: mutual funds, P+C insurance

Question 2

Whats causes liquidity risk on the liability side and asset side

Answer 2

liability = sudden outflow of deposits
assets= default rate= bad quality of loans, off balance sheet activities= people start borrowing on them

Question 3

what is purchased liquidity management

Answer 3

borrowing from outside sources to keep cash flow steady (borrowing from another bank)

Question 4

what is stored liquidity management

Answer 4

when bank uses tits own cash or liquid assets to meet its cash needs instead of borrowing

Question 5

what is liquidity index

Answer 5

measures how quickly asset can be converted to cash without losing much value (higher index means can be sold quickly at their true value)

Question 6

what is liquidity planning

Answer 6

process where banks make sure they have enough cash to cover short term expenses

Question 7

why is an excess of liquidity not good

Answer 7

reinvestment problem (liabilities>assets) , too many deposits need to go find loans

Question 8

what comes first bank panic or bank run

Answer 8

bank panic then bank run