Which of the following situations can lead to a liquidity deficit? (multiple answers may be correct)Group of answer choicesAn investigative journalist highlights that your bank has poor liquidity managementYou have large credit commitments exclusively to firms with highly volatile cashflows. These firms are now hit with a negative shock.Your shareholders request that 90% of this year's profit is distributed in the form of dividends.The value of your trading portfolio value drops by 30%.The value of your investment portfolio value drops by 30%
Question
Which of the following situations can lead to a liquidity deficit? (multiple answers may be correct)Group of answer choicesAn investigative journalist highlights that your bank has poor liquidity managementYou have large credit commitments exclusively to firms with highly volatile cashflows. These firms are now hit with a negative shock.Your shareholders request that 90% of this year's profit is distributed in the form of dividends.The value of your trading portfolio value drops by 30%.The value of your investment portfolio value drops by 30%
Solution
The situations that can lead to a liquidity deficit are:
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An investigative journalist highlights that your bank has poor liquidity management: This can lead to a liquidity deficit as it may cause a loss of confidence in the bank, leading to a run on the bank as depositors withdraw their funds.
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You have large credit commitments exclusively to firms with highly volatile cashflows. These firms are now hit with a negative shock: This can lead to a liquidity deficit as these firms may default on their loans, leading to a decrease in the bank's assets.
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Your shareholders request that 90% of this year's profit is distributed in the form of dividends: This can lead to a liquidity deficit as it reduces the amount of retained earnings, which are a source of internal financing.
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The value of your trading portfolio value drops by 30%: This can lead to a liquidity deficit as it reduces the value of the bank's assets, which can be used to meet its liabilities.
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The value of your investment portfolio value drops by 30%: This can also lead to a liquidity deficit as it reduces the value of the bank's assets, which can be used to meet its liabilities.
Similar Questions
Which of the following is NOT a potential cause of liquidity risk for a bank? A.A decrease in the availability of short-term borrowed funds.B.An increase in requests by depositors to withdrawal large amounts of deposits.C.A decrease in the bank's stock price caused by market factors.D.An increase in requests to fund large amounts of loan commitments.E.A decrease in asset prices of securities held in the investment portfolio.
If liquidity requirements increase, what is likely to happen to this interest rate margin and bank risk?
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