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Answer: Widening spreads on the bank's issued debt and credit default swap
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