Which of the following statements is FALSE?A.When the FI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract.B.An FI's most liquid asset is cash. C.Mutual funds tend to have more exposure to liquidity risk than banks. D.Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks. E.A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.
Question
Which of the following statements is FALSE?A.When the FI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract.B.An FI's most liquid asset is cash. C.Mutual funds tend to have more exposure to liquidity risk than banks. D.Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks. E.A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.
Solution
C. Mutual funds tend to have more exposure to liquidity risk than banks.
This statement is false. Banks typically have more exposure to liquidity risk than mutual funds. This is because banks have more short-term liabilities (such as deposits) that can be withdrawn at any time, while mutual funds have assets that are invested in securities that can be sold to meet redemption requests. Additionally, banks are subject to reserve requirements, which can further increase their liquidity risk.
Similar Questions
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