Explanation:
To mitigate the risk of a loss of liquidity due to a run by short-term creditors, a bank can employ multiple strategies. Setting up a buffer of highly liquid assets (such as cash or unencumbered securities) ensures immediate availability of funds. Establishing emergency credit lines provides an additional backstop. Managing and staggering the maturity profile of its liabilities prevents a large concentration of debt coming due simultaneously. Thus, all of the mentioned steps are valid and effective liquidity risk mitigation measures.
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Q.60 Capital Bank, based in Ireland, is a dealer bank. The bank has several revenue-generating segments, including investment banking, deposit taking, and corporate lending. The CRO is wary of liquidity problems that could be triggered by a run arising from unprecedented poor performance or some other external shock. Which of the following steps could the bank take to mitigate the risk of loss of liquidity from a run by short-term creditors?
A
Setting up a buffer stock of cash or securities
B
Establishing emergency lines of credit
C
Streamlining the maturities of its liabilities to cap the maximum number of liabilities that must be settled with a given period of time.
D
All of the above
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