Financial Risk Manager Part 2

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Explanation:

Explanation

Let's analyze each indicator:

Positive indicators (+): Increase is favorable, decrease is concerning

Hot money ratio (+) - Money market assets / Volatile liabilities
Core deposit ratio (+) - Core deposits / Total assets

Negative indicators (-): Decrease is favorable, increase is concerning

Capacity ratio (-) - Net loans and leases / Total assets
Pledged securities ratio (-) - Pledged securities / Total assets
Deposit composition ratio (-) - Demand deposits / Time deposits

For positive indicators, an unexpected drop would be concerning (red/yellow flag). For negative indicators, an unexpected increase would be concerning.

Since the question asks for which indicator (besides Core deposit ratio) would an unexpected drop be concerning, we need to look for other positive indicators.

The only other positive indicator among the five listed is the Hot money ratio.

Hot money ratio (+) - A drop would mean less money market assets relative to volatile liabilities, indicating reduced liquidity buffer
Capacity ratio (-) - A drop would actually be favorable (less loans relative to assets)
Pledged securities ratio (-) - A drop would be favorable (fewer pledged securities)
Deposit composition ratio (-) - A drop would be favorable (less demand deposits relative to time deposits)

Therefore, the correct answer is B. Hot money ratio.

Explanation:

Explanation

Let's analyze each indicator:

Positive indicators (+): Increase is favorable, decrease is concerning

Hot money ratio (+) - Money market assets / Volatile liabilities
Core deposit ratio (+) - Core deposits / Total assets

Negative indicators (-): Decrease is favorable, increase is concerning

Capacity ratio (-) - Net loans and leases / Total assets
Pledged securities ratio (-) - Pledged securities / Total assets
Deposit composition ratio (-) - Demand deposits / Time deposits

For positive indicators, an unexpected drop would be concerning (red/yellow flag). For negative indicators, an unexpected increase would be concerning.

Since the question asks for which indicator (besides Core deposit ratio) would an unexpected drop be concerning, we need to look for other positive indicators.

The only other positive indicator among the five listed is the Hot money ratio.

Hot money ratio (+) - A drop would mean less money market assets relative to volatile liabilities, indicating reduced liquidity buffer
Capacity ratio (-) - A drop would actually be favorable (less loans relative to assets)
Pledged securities ratio (-) - A drop would be favorable (fewer pledged securities)
Deposit composition ratio (-) - A drop would be favorable (less demand deposits relative to time deposits)

Therefore, the correct answer is B. Hot money ratio.

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Below are five of the ten liquidity indicators defined in Rose and Hudgins (the other five are Cash position, Liquid securities, Net federal funds and repurchase agreements position, Deposit brokerage index, and Loan commitments ratio).

Capacity ratio = Net loans and leases divided by Total assets (-)

Pledged securities ratio = Pledged securities divided by Total Assets (-)

Hot money ratio = Money market assets divided by Volatile liabilities (+)

Core deposit ratio = Core deposits divided by Total assets (+)

Deposit composition ratio = Demand deposits divided by Time deposits (-)

If the Core deposit ratio unexpectedly dropped, this might be a red flag liquidity indicator. Put another way, the Core deposit ratio is a positive liquidity indicator such that its increase is generally favorable or indicative of a safer situation for the firm with respect to its liquidity needs. Negative liquidity indicators go in the opposite direction: their decrease is favorable while their increase might be cause for concern.

Among the five liquidity indicators listed above, in addition to the Core deposit ratio, which is a POSITIVE liquidity indicator; for which would an unexpected drop maybe be a yellow- or red-flag cause for concern?

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