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Answer: Hot money ratio
## 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).
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?
A
Capacity ratio
B
Hot money ratio
C
Pledged securities ratio
D
Deposit composition ratio