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Answer: Rapid growth in the leverage ratio with significant dependence on short-term repo financing
The correct answer is C, which indicates that a rapid growth in the leverage ratio combined with significant dependence on short-term repo financing is an early warning indicator of a potential liquidity problem. This is because an increase in leverage can lead to higher risk exposure, and reliance on short-term financing can make the bank vulnerable to liquidity shocks, as these funds may not be readily available when needed. On the other hand, decreased collateral haircuts, a credit rating upgrade, and increased asset diversification are generally positive developments for a bank and do not signal potential liquidity issues. These factors can enhance the bank's creditworthiness, reduce the cost of borrowing, and improve its ability to manage risks, respectively.
Author: LeetQuiz Editorial Team
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In the context of banking and financial risk management, early detection of liquidity issues is crucial for maintaining stability. The Basel Committee has recommended various early warning indicators for banks to monitor their liquidity positions. One specific indicator suggested by the Basel Committee to help banks identify potential liquidity issues and emerging risks in their liquidity stance is known as what?
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
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