What is “purchased liquidity” and what are its advantages and disadvantages? Wha

Question

What is “purchased liquidity” and what are its advantages and disadvantages?

What is “stored liquidity” and what are its advantages and disadvantages?

Why does it often pay for a financial institution to use purchased liquidity instead of stored liquidity to meet deposit drains?

Give an example of a “source of liquidity” for a bank

Give an example of a “use of liquidity”

Explain what a “net liquidity statement” is and how it’s used

What is the “liquidity index” and what does it mean if the index has a high value?

What is the financing gap and what does it mean if the gap has a high value?

What is the liquidity coverage ratio?

What is the net stable funding ratio?

Why do bank runs occur?

Why do banking panics occur?

Why do insurance companies sometimes face “runs?”

Do insurance guarantee programs protect policyholders as well as deposit insurance protects bank depositors? Why or why not?

Explanation / Answer

purchased liquidity-increase. liabilities by. borrowing. funds or issuing. equity Benefit. is that. it does. not rely. on the availability. of funds on. the market.-purchased. liquidity. can be. expensive- pay. higher. market. rates. for. funds to offset. net drains. on low-interest. bearing. deposits. Availability. may. also be. limited. since. lenders. are. concerned about. the. solvency

stored liquidity- An. adjustment. to. a. deposit. drain. that. occurs. on. the. asset .side of .the .balance .sheet.The benefit. is. that. it does. not rely. on the. availability. of funds. on the. market. They’re. available. in good times. and bad. Disadvantages. include. The. amount. of equity. capital. required. to support. the volume. of assets needed. The additional. interest. rate risk. that may. be incurred. by having. a large volume. of liquid assets. on your balance sheet

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