Answer: Bank Q

**Correct Answer: B** **Explanation:** A liquidity crisis could materialize if repo creditors become nervous about a bank's solvency and choose not to renew their positions. If enough creditors choose not to renew, the bank could likely be unable to raise sufficient cash by other means on such short notice, thereby precipitating a crisis. The bank may therefore be forced to sell its assets in a hurry to buyers that know it needs to sell quickly. This leads to the potential for a fire sale and supports using the proportion of assets covered by repos as a signal of liquidity risk. To determine which bank is most vulnerable, we need to calculate the percentage of assets pledged as collateral for each bank: - **Bank P**: 258 / 656 = 39.3% - **Bank Q**: 472 / 750 = 62.9% - **Bank R**: 139 / 339 = 41.0% - **Bank S**: 209 / 835 = 25.0% Bank Q has the highest percentage of its assets pledged as collateral (62.9%), making it most dependent on short-term repo financing. If repo creditors become nervous and refuse to renew positions, Bank Q would face the greatest liquidity crisis as it relies most heavily on this funding source. Also, low prices recorded in a fire sale could lower the market valuation of securities not sold, and thus reduce the amount of cash that could be raised through repurchase agreements collateralized by those securities. Overall, this vulnerability is directly related to the proportion of assets a bank has pledged as collateral.

Author: LeetQuiz .