Bank Liquidity

Question 1

What is the first line of defense against bank illiquidity?

a. Government bailouts
b. Sound bank liquidity policy
c. Printing more money
d. Public deposit guarantees

Answer 1

b. Sound bank liquidity policy

Question 2

What does the lender of last resort (LOLR) address?

a. Profit generation
b. Fraud detection
c. Liquidity crises
d. Capital market growth

Answer 2

c. Liquidity crises

Question 3

An institution is liquid if it can:

a. Increase profits within 3 months
b. Create new loan products quickly
c. Meet scheduled payments without high costs
d. Avoid long-term investments

Answer 3

c. Meet scheduled payments without high costs

Question 4

A bank is liquid if it can:

a. Sell real estate properties
b. Repay borrowers when due without fire-sale prices
c. Issue new shares immediately
d. Merge with another bank quickly

Answer 4

b. Repay borrowers when due without fire-sale prices

Question 5

Liquidity in banking refers to:

a. The bank’s net income
b. The ability to expand credit limits
c. Meeting financial obligations as they come due
d. International cash flows

Answer 5

c. Meeting financial obligations as they come due

Question 6

Solvency refers to a firm’s ability to:

a. Meet short-term debts
b. Launch new banking services
c. Meet long-term bills and obligations
d. Secure government contracts

Answer 6

c. Meet long-term bills and obligations

Question 7

Liquidity measures how much:

a. Long-term debt a company holds
b. Cash a company has on hand
c. Land the company owns
d. Products a company sells

Answer 7

b. Cash a company has on hand

Question 8

Why is liquidity important to banks?

a. To meet marketing goals
b. To issue credit cards
c. To meet withdrawals and fund growth
d. To reduce branch count

Answer 8

c. To meet withdrawals and fund growth

Question 9

Banks manage liquidity by:

a. Reducing asset value
b. Creating liquidity on the balance sheet
c. Outsourcing cash management
d. Increasing advertising

Answer 9

b. Creating liquidity on the balance sheet

Question 10

What is the Liquidity Coverage Ratio (LCR)?

a. A bank’s insurance level
b. A ratio to assess loan quality
c. A requirement to hold enough liquid assets to fund 30 days of outflows
d. A tax on liquidity reserves

Answer 10

c. A requirement to hold enough liquid assets to fund 30 days of outflows

Question 11

Primary sources of liquidity include:

a. Real estate
b. Inventory
c. Cash and short-term funds
d. Equity shares

Answer 11

c. Cash and short-term funds

Question 12

What is bank liquidity risk?

a. Risk of inflation
b. Risk of asset owner not recovering full value on sale
c. Risk of fraud
d. Risk of audit failure

Answer 12

b. Risk of asset owner not recovering full value on sale

Question 13

A bank liquidity ratio measures:

a. All long-term assets
b. Convertible assets against obligations
c. Advertising budget
d. Staff performance

Answer 13

b. Convertible assets against obligations

Question 14

What is the Quick or Acid Test Ratio concerned with?

a. Long-term profits
b. Immediate debt obligations
c. Market share
d. Equity investments

Answer 14

b. Immediate debt obligations

Question 15

What’s a desirable liquidity ratio?

a. Low and consistent
b. High, to withstand shocks
c. Varies with seasons
d. Fixed at 50%

Answer 15

b. High, to withstand shocks

Question 16

A bank run may be caused by:

a. Staff resignation
b. Positive financial results
c. Adverse depositor sentiment
d. Good audit reports

Answer 16

c. Adverse depositor sentiment

Question 17

Interbank market runs may occur due to:

a. High security
b. Collateral surplus
c. Low information gathering
d. Central bank indifference

Answer 17

c. Low information gathering

Question 18

Secondary sources of liquidity include:

a. Cash balances
b. Liquidating assets
c. Inventory purchases
d. Ad campaigns

Answer 18

b. Liquidating assets

Question 19

Cash equivalents typically have a maturity of:

a. 1 year
b. 6 months
c. Less than 90 days
d. More than 2 years

Answer 19

c. Less than 90 days

Question 20

A decentralized collection system may:

a. Improve liquidity
b. Hinder timely access to cash
c. Reduce customer service
d. Eliminate cash flow

Answer 20

b. Hinder timely access to cash

Question 21

Liquidating assets usually involves:

a. Asset appreciation
b. Selling assets at normal prices
c. Discounts due to urgency
d. New investments

Answer 21

c. Discounts due to urgency

Question 22

What is liability management?

a. Handling fraud cases
b. Managing profit levels
c. Ensuring cost-effective funding of assets
d. Avoiding taxes

Answer 22

c. Ensuring cost-effective funding of assets

Question 23

The lender of last resort (LOLR) is typically:

a. A private bank
b. An international fund
c. The Central Bank
d. The Ministry of Labor

Answer 23

c. The Central Bank

Question 24

The LOLR supports institutions by:

a. Acquiring their loans
b. Providing discretionary liquidity
c. Reducing their taxes
d. Auditing their performance

Answer 24

b. Providing discretionary liquidity

Question 25

LOLR aims to: a. Cause panic runs b. Promote mergers c. Prevent illiquidity turning into insolvency d. Reduce capital flows

Answer 25

c. Prevent illiquidity turning into insolvency

Question 26

What is a cost of LOLR support? a. Encourages market innovation b. Weakens central bank’s balance sheet c. Enhances moral discipline d. Reduces systemic risk

Answer 26

b. Weakens central bank’s balance sheet

Question 27

To minimize LOLR costs, central banks should: a. Lend without conditions b. Support all distressed banks c. Support only illiquid but solvent banks d. Allow all requests

Answer 27

c. Support only illiquid but solvent banks

Question 28

In a systemic crisis, LOLR should: a. Apply penalty rates b. Delay support c. Relax collateral and solvency requirements d. Wait for market recovery

Answer 28

c. Relax collateral and solvency requirements

Question 29

What is the role of LOLR during systemic crises? a. Increase investor profits b. Encourage banking mergers c. Stop panic runs d. Create new taxes

Answer 29

c. Stop panic runs

Question 30

LOLR operations should be: a. Always secret b. Transparent in real time c. Discretionary but accountable d. Ignored in monetary policy

Answer 30

c. Discretionary but accountable

Question 31

What is a key reason for sterilisation of liquidity support? a. To avoid foreign investment b. To stop inflation and capital outflows c. To reduce taxes d. To promote lending

Answer 31

b. To stop inflation and capital outflows

Question 32

In normal times, LOLR may use: a. Deposit insurance only b. Discounts, advances, and repos c. Foreign investment d. Government bonds

Answer 32

b. Discounts, advances, and repos

Question 33

In a systemic crisis, LOLR must: a. Focus on profits b. Guarantee all losses c. Be part of an overall macroeconomic strategy d. Cut liquidity completely

Answer 33

c. Be part of an overall macroeconomic strategy

Question 34

What is a consequence of supporting insolvent banks? a. Higher liquidity b. Risk-free lending c. Direct costs to government d. Lower currency reserves

Answer 34

c. Direct costs to government

Question 35

What is one function of liquidity management? a. Expanding branches b. Avoiding panic runs c. Increasing advertising d. Creating non-performing loans

Answer 35

b. Avoiding panic runs

Question 36

What should be the final backup for liquidity crises? a. Corporate bonds b. Ministry of Education c. Fiscal policy d. Insurance policies

Answer 36

c. Fiscal policy