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Answer: Bank A
## Explanation To determine which bank is least vulnerable to a liquidity crisis when repo creditors become nervous, we need to analyze the **collateralization ratio** - the proportion of financial instruments that are pledged as collateral. **Calculating the collateralization ratio for each bank:** - **Bank A**: 272 / 823 = 33.0% - **Bank B**: 289 / 629 = 45.9% - **Bank C**: 380 / 723 = 52.6% - **Bank D**: 155 / 382 = 40.6% **Analysis:** - **Bank A has the lowest collateralization ratio (33.0%)**, meaning it has the highest proportion of unpledged assets available to raise additional liquidity if needed. - When repo creditors become nervous, they may refuse to roll over repo agreements, creating a liquidity crunch. - Banks with higher proportions of unpledged assets (lower collateralization ratios) have more flexibility to: - Sell unpledged assets to raise cash - Pledge additional assets to secure new funding - Use unpledged assets as collateral for emergency liquidity facilities **Therefore, Bank A is least vulnerable to a liquidity crisis** because it has the largest buffer of unpledged assets relative to its total financial instruments.
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In recent years, large dealer banks financed significant fractions of their assets using short-term, often overnight repurchase (repo) agreements in which creditors held bank securities as collateral against default losses. The table below shows the quarter-end financing of four broker-dealer banks. All values are in USD billions:
| Bank A | Bank B | Bank C | Bank D | |
|---|---|---|---|---|
| Financial instruments owned | 823 | 629 | 723 | 382 |
| Pledged as collateral | 272 | 289 | 380 | 155 |
In the event that repo creditors become nervous about a bank's solvency, which bank is least vulnerable to a liquidity crisis?
A
Bank A
B
Bank B
C
Bank C
D
Bank D