1. To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.
2. One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.
3. One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is
the relatively illiquid nature of their liabilities.
4. A liquid asset can be converted to cash quickly, but will require a discount from market value.
5. Holding small amounts of liquid assets could cause an FI to be unable to meet the claims of liability holders.
6. In the U.S., banks can hold cash and government securities to meet reserve requirements.
7. Excessive illiquidity can result in an FI’s inability to meet required payments on liability claims and, at the
extreme, in insolvency.
8. The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.
9. In most countries, regulators often set minimum liquid reserve requirements on FIs.
10. In the U.S., excess reserves held at the central bank pay interest to the DI.
11. In most countries, assets used to satisfy the liquid assets ratio may include liquid government securities.
12. Regulators in the U.S. do not allow government securities to perform the role of a required reserve.
13. In the U.S., cash reserves necessary to meet deposit reserve requirements typically include vault cash and
cash deposits at the Federal Reserve Bank.
14. Managing a bank’s reserve position requires knowing only the target reserve ratio and the period over which
reserves must be maintained.
15. By definition, all transaction accounts at U.S. FIs allow account holders to make unlimited withdrawals.
16. The reserve computation period for determining required reserves covers the 14 days of a two-week period
that runs from Monday to Monday.
17. Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.
18. 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.
19. A strategy to lower deposits on Fridays can lower reserve requirements for a bank.
20. A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following
Monday is called the weekend game.
21. The contemporaneous reserve accounting system requires the maintenance period to occur simultaneously
with the computation period.
22. Currently the reserve maintenance period begins 30 days after the end of the reserve computation period.
23. The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges
as well as implicit costs in the form of more frequent monitoring and examinations.
24. One method of increasing reserves to meet a reserve target is to sell liquid assets.
25. The interbank funds market is a potential source for increasing reserves to meet required reserves.
26. Up to six percent of excess reserves may be carried forward to the next reserve maintenance period.
27. The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than
market rates.
28. Federal Reserve primary credit loans available to DIs are generally at rates lower than the federal funds
target rate.
29. Excessive amounts of liquid asset holdings can penalize the earnings of a DI.
30. Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost
and higher risk of withdrawals.
31. Funding costs generally are positively related to the period of time the liability remains on the balance
sheet.
32. Demand deposits are a costless source of funds and have a high degree of withdrawal risk.
33. Deposits with low withdrawal risk typically are the lowest cost deposits for a DI.
34. Implicit interest involves the process of crediting the interest payment directly to a deposit account as
opposed to sending an explicit interest check to the customer.
35. If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services,
the bank receives a subsidy or implicit interest payment.
36. One cost of demand deposits to DIs is the reserve requirement placed on the bank by the Federal Reserve.
37. NOW accounts are potentially less prone to withdrawal risk than demand deposits.
38. The DI can influence the withdrawal rates of NOW accounts through explicit interest payments, implicit
interest payments, or minimum balance requirements.
39. NOW accounts allow the explicit payment of interest.
40. The DI manager can change the pricing on NOW accounts by changing both implicit and explicit interest
payments.
41. Passbook savings accounts normally receive a lower interest rate than NOW accounts.
42. Passbook savings accounts are less liquid than demand deposit accounts.
43. The interest rate paid on money market deposit accounts by U.S. DIs must directly reflect the rates earned
on investments in commercial paper, bankers acceptances, repurchase agreement, and T-bills.
44. MMDAs are considered to be more liquid than demand deposits and NOW accounts.
45. In the U.S., MMDAs typically are transaction accounts without limitations on the size or number of checks
or transfers that can occur each month.
46. Because MMDAs are in direct competition with MMMFs, the withdrawal rate is affected by the relative
amount of explicit interest paid on these accounts.
47. Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the
scheduling of interest and principal payments.
48. Because of penalties imposed for early withdrawal, a CD depositor is unlikely to withdrawal the CD funds
from the bank before maturity.
49. Short-term CDs often are priced competitively with T-bills of similar maturity.
50. The negotiable instrument characteristic of large wholesale CDs effectively eliminates the adverse
withdrawal risk for the bank.
51. Because the minimum amount of a negotiable wholesale CD is $100,000, holders of these CDs are fully
covered by FDIC insurance.
52. Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have
liquidity needs.
53. Fed funds are short-term uncollateralized loans with maturities that typically do not exceed one day.
54. Fed funds are subject to settlement risk, but have little or no early withdrawal risk.
55. FIs participating in the fed funds market, either buying or selling, are usually able to do so without amount
or maturity restrictions.
56. The advantage to a lender in a repurchase agreement transaction versus a fed funds sale is the collateral of
government securities or other acceptable liquid assets provided by the borrowing FI.
57. Because of the collateral feature, RPs typically have a higher interest rate than fed funds.
58. In the U.S., a subsidiary bank can issue commercial paper to meet short-term liquidity needs, but the bank’s
parent holding company cannot.
59. Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the
60. Most large banks in the U.S. directly issue commercial paper to meet their liquidity needs.
61. Although they are subject to reserve requirements, many DIs have begun to issue medium-term notes
because they are a stable source of funds.
62. The increased securitization of bank loans has reduced the liquidity of bank assets.
63. Recently banks have changed the liability structure towards instruments that have less withdrawal risk and
higher explicit interest costs.
64. Reliance on purchased or borrowed funds will largely eliminate the liquidity risk faced by a bank.
65. Property-casualty insurance companies typically have greater liquidity risk than life insurance companies.
66. Property-casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage
across different types of disasters.
67. Because investment banks typically buy and sell securities on a regular basis; they have no need for a
liability management plan.
68. Which of the following observations is NOT true of a liquid asset?
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?
70. Which of the following is considered to be the most liquid asset?
71. The concept of constrained optimization facing an FI manager involving the minimum amount of liquid
reserve assets required by regulators may
72. Which of the following is an outcome of an increase in the reserve requirement ratio?
73. Which of the following is an outcome of a decrease in the reserve requirement ratio?
74. Requiring minimum reserves to be held at the central bank is the equivalent of
75. Required reserve ratios in the U.S. for demand deposits are
76. For a DI in the U.S with $200 in assets and $180 in deposits, a liquid assets ratio of 15 percent
77. Many states in the U.S. impose liquid asset ratios on insurance companies which may be met by
78. Buffer reserves at DIs are
79. Managing the reserve position of a U.S. bank requires knowing
80. For reserve calculation purposes, the period that begins on a Tuesday and ends on a Monday 14 days later is
known as