Answer: Widening spreads on the bank's issued debt and credit default swap.

## Explanation **Option C (Widening spreads on the bank's issued debt and credit default swap) is the strongest warning signal for potential liquidity risk** because: - **Market perception of credit risk**: Widening spreads on the bank's debt and CDS indicate that market participants perceive increased credit risk for the institution - **Funding costs increase**: Higher spreads mean the bank will face higher costs when trying to issue new debt or roll over existing debt - **Counterparty concerns**: Other financial institutions may become reluctant to lend to or transact with the bank - **Potential for funding withdrawal**: Widening spreads can trigger concerns among depositors and other funding providers, potentially leading to funding outflows **Analysis of other options:** - **Option A**: A decrease in another bank's stock price doesn't directly signal liquidity risk for the bank being assessed - **Option B**: An increase in credit lines from other institutions actually improves liquidity buffers and reduces immediate liquidity risk - **Option D**: Significant asset growth funded by stable liabilities is generally positive for liquidity management, as stable liabilities provide more reliable funding **Key takeaway**: Widening spreads reflect market concerns about the bank's creditworthiness, which can quickly translate into liquidity pressures as counterparties and funding providers become more cautious.

Author: LeetQuiz .