Financial Risk Manager Part 2
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The Basel Committee advises financial institutions to utilize a range of early warning indicators to identify escalating risks and potential vulnerabilities in their liquidity position. Among the following options, which is considered an early warning signal of an impending liquidity problem?
Exam-Like
A
Credit rating upgrade
B
Increased asset diversification
C
Rapid growth in the leverage ratio with significant dependence on short-term repo financing
D
Decreased collateral haircuts applied to the bank's collateralized exposures
Explanation:
C is correct. Rapid levered asset growth combined with substantial use of short-term repos is an early warning of a potential liquidity problem. Decreased collateral haircuts, a credit rating upgrade, and increased asset diversification are generally positive developments and not early warnings of a potential liquidity problem.
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