Chapter Seventeen
Liquidity Risk
天津公务员考试培训
Chapter Outline
Introduction
Caus of Liquidity Risk英语虚拟语气
Liquidity Risk at Depository Institutions
∙Liability-Side Liquidity Risk
∙Ast-Side Liquidity Risk
∙Measuring a DI’s Liquidity Exposure
∙bruno mars marry youLiquidity Risk, Unexpected Deposit Drains, and Bank Runs
∙Bank Runs, the Discount Window, and Deposit Insurance
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Liquidity Risk and Life Insurance Companies日语在线翻译中文
Liquidity Risk and Property-Casualty Insurers
Mutual Funds
Summary
abreastSolutions for End-of-Chapter Questions and Problems: Chapter Seventeen
1.How does the degree of liquidity risk differ for different types of financial institutions?
Depository institutions are the FIs most expod to liquidity risk. Mutual funds, pension funds, and PC insurance companies are the least expod. In the middle are life insurance companies.
2.What are the two reasons liquidity risk aris? How does liquidity risk arising from the liability side of the balance sheet differ from liquidity risk arising from the ast side of the balance sheet? What is meant by fire-sale prices?
小学生法制教育资料Liquidity risk occurs becau of situations that develop from economic and financial transactions that are reflected on either the ast side of the balance sheet or the liability side of the balance sheet of an FI. Ast-side risk aris from transaction that result in a transfer of cash to some other ast, such as the exerci of a loan commitment or a line of credit. Liability-side risk aris from transactions whereby a creditor, depositor, or other claim holder demands cash in exchange for the claim. The withdrawal of funds from a bank is an example of such a transaction. A fire-sale price refers to the price of an ast that is less than the normal market price becau of the need or desire to ll the ast immediately under conditions of financial distress.
3.What are core deposits? What role do core deposits play in predicting the probability distribution of net deposit drains?
Core deposits are tho deposits that will stay with the bank over an extended period of time. The deposits are relatively stable sources of funds and consist mainly of demand, savings, and retail time deposits. Becau of their stability, a higher level of cor
e deposits will increa the predictability of forecasting net deposit drains from the bank.
4.The probability distribution of the net deposit drain of a DI has been estimated to have a mean of 2 percent and a standard deviation of 1 percent. Is this DI increasing or decreasing in size? Explain.
This DI is decreasing in size becau less core deposits are being added to the bank than are being withdrawn. On average, the rate of decrea of deposits is 2 percent. If the distribution is normal, we can state with 95 percent confidence that the rate of decrea of deposits will be between 0 percent and 4 percent (plus or minus two standard deviations).
5. How is the DI's distribution pattern of net deposit drains affected by the following?
a. The holiday ason. The entire distribution shifts to the right (an increa in the expected amount of withdrawals) as individuals spend more. Moreover, the standard deviation decreas as the distribution narrows.
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b. Summer vacations. The entire distribution shifts to the right (an increa in the expected amount of withdrawals) as individuals spend more. Moreover, the standard deviation decreas as the distribution narrows.
c. A vere economic recession. The entire distribution shifts to the left and may have a negative mean value as withdrawals average more than deposits. However, as the opportunity cost of holding money declines, some depositors may increa their net deposits. The impact will be to widen the distribution.
d. Double-digit inflation. The entire distribution shifts to the left and may have a negative mean value as withdrawals average more than deposits. Inflation may cau a general flight from money that will cau the distribution to narrow.
6. What are two ways a DI can offt the liquidity effects of a net deposit drain of funds? How do the two methods differ? What are the operational benefits and costs of each method?
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If the DI has a net deposit drain, it needs to either increa its liabilities (by borrowing funds or issuing equity) or reduce its asts. An institution can reduce its asts by drawing down on its cash rerves, lling curities, or calling back (or not renewing) its loans. It can increa liabilities by issuing more Federal funds, long-term debt, or new issues of equity. If a DI offts the drain by increasing liabilities, the size of the firm remains the same. However, if it offts the drain by reducing its asts, the size of the firm is reduced. If it has a net negative deposit drain, then it needs to follow the opposite strategy.
