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Answer: Widening spreads on the bank's issued debt and credit default swap.
The strongest warning signal for potential liquidity risk at the bank is option C, which is the widening spreads on the bank's issued debt and credit default swap. This is because wider spreads suggest a loss of market confidence in the bank and an increased cost of funding, which are both indicative of heightened liquidity risk. Option A, a decrease in stock price of the bank's peers but not in the bank's stock price, is not as strong an indicator as it would be more relevant if the bank's own stock price were decreasing relative to its peers. Option B, an increase in credit lines received from other financial institutions, is incorrect because a decrease in credit lines would be a more problematic sign for liquidity. Lastly, option D, significant asset growth funded by an increase in stable liabilities, is not a warning signal for liquidity risk; rather, rapid asset growth funded by volatile liabilities would be more concerning. The correct evaluation of early warning indicators is crucial for assessing and managing liquidity and treasury risk effectively.
Author: LeetQuiz Editorial Team
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As part of an assessment to determine a small bank's vulnerability to liquidity risk, a risk consultant reviews a presentation prepared by the bank. This presentation outlines various early warning indicators that are intended to signal an elevated risk of liquidity problems. Among the patterns listed, which one should the consultant identify as the strongest indicator of potential liquidity risk at the bank?
A
Decrease in stock price of the bank's peers but not in the stock price of the bank itself.
B
Increase in credit lines received from other financial institutions.
C
Widening spreads on the bank's issued debt and credit default swap.
D
Significant asset growth funded by an increase in stable liabilities