Answer: Narrowing debt/CDS spreads.

## Explanation **Option A** is the correct answer because: - **Narrowing debt/CDS spreads** indicates improving credit conditions and reduced perceived risk by the market - When debt spreads narrow, it means investors are demanding lower risk premiums, suggesting the bank's creditworthiness is improving - This is typically a positive signal, not a red flag for liquidity problems **Why Option B is a red flag:** - **Sudden increase in debt costs** signals that lenders perceive higher risk and are demanding higher compensation - This indicates deteriorating market confidence and potential funding difficulties - Higher borrowing costs directly impact liquidity by making funding more expensive and potentially less available In liquidity early warning systems, red flags typically include: - Widening credit spreads - Increasing funding costs - Declining stock prices - Credit rating downgrades - Counterparty withdrawal - Negative news coverage Narrowing spreads represent improving conditions and are therefore NOT red flags.

Author: LeetQuiz .