Explanation:
Option A is false: Retail deposits are generally considered a more stable source of funding compared to wholesale deposits. Option B is true: A lack of confidence or market panic can easily trigger a run on an institution, leading to severe liquidity funding problems, even if the institution is otherwise fundamentally sound. Option C is false: Solvency (assets exceeding liabilities) and liquidity (having enough cash to meet short-term obligations) are distinct. A solvent firm can still experience a liquidity crisis if its assets are highly illiquid. Option D is false: Cases like Metallgesellschaft and Ashanti Goldfields illustrate that hedging positions (particularly with derivatives) can lead to massive margin calls, creating significant liquidity funding problems.
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20.3.1. Liquidity funding risk refers to the firm’s ability to meet its cash needs. About liquidity funding risk, which of the following statements is TRUE?
A
Wholesale deposits are the most stable source of funding
B
A lack of confidence can contribute to an institution's liquidity funding problems
C
A solvent firm cannot experience a liquidity funding problem; i.e., only an insolvent firm can experience a liquidity problem
D
Case studies such as Northern Rock and Ashanti Goldfields demonstrate that a hedged position is the best protection against liquidity funding problems