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Answer: The bank's capacity ratio has been increasing.
**B is correct.** Capacity ratio is the ratio of net loans and leases to total assets, so liquidity decreases when net loans and leases increase relative to total assets, because they are often illiquid. **A is incorrect.** Liquidity increases when overnight loans increase relative to overnight borrowing. **C is incorrect.** Liquidity increases when fewer securities are pledged/unavailable to sell relative to total securities. **D is incorrect.** Liquidity increases when loan commitments decrease relative to total assets. **Section:** Liquidity and Treasury Risk **Learning Objective:** Estimate a bank's liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indicators). **Reference:** Peter Rose, Sylvia Hudgins, Bank Management & Financial Services, 9th Edition (McGraw-Hill Companies, Inc., 2013). Chapter 11 - Liquidity and Reserve Management: Strategies and Policies
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A credit analyst is evaluating the liquidity of a small regional bank while preparing a report for a credit committee meeting. With quarterly financial statements, the analyst calculates some relevant liquidity indicators over the past three years. Which of the following trends over this period should the analyst be most concerned about in the credit risk report?
A
The bank's average net federal funds and repurchase agreements position has been increasing.
B
The bank's capacity ratio has been increasing.
C
The bank's pledged securities ratio has been decreasing.
D
The bank's loan commitments ratio has been decreasing.