Explanation:
The correct answer is C. Widening spreads on the bank's issued debt and credit default swap. This is because wider spreads indicate a loss of market confidence in the bank and a higher cost of funding, which can be a strong warning signal for potential liquidity risk. A decrease in the stock price of the bank's peers but not in the bank itself (option A) is not a strong indicator of liquidity risk specific to the bank. An increase in credit lines received from other financial institutions (option B) is not problematic for liquidity; in fact, a decrease in credit lines would be a concern. Significant asset growth funded by an increase in stable liabilities (option D) is not necessarily problematic for liquidity risk; rather, rapid asset growth funded by volatile liabilities would be a concern.
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In the assessment of a small bank's liquidity risk profile, a risk consultant examines a presentation that includes a series of early warning indicators pointing to a potential rise in liquidity risk. Among these indicators, which trend should the consultant identify as the most significant alarm for escalating 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
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