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:
Analysis:
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.
Ultimate access to all questions.
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
No comments yet.