Explanation:
Vulnerability to a liquidity run in the context of repo financing is often assessed by examining the proportion of the bank's assets that are encumbered (pledged as collateral). A higher proportion indicates greater reliance on short-term wholesale funding and fewer unencumbered assets available to pledge for emergency liquidity. Let's calculate the ratio of pledged collateral to instruments owned for each bank:
Bank C has the highest proportion of its instruments pledged as collateral (44.44%), making it the most vulnerable to a liquidity crisis if repo creditors refuse to roll over their financing or require higher haircuts. Therefore, Bank C is the most vulnerable.
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Q.1 In recent years large dealer banks have increasingly resulted to financing a significant part of their assets using short-term finance solutions like overnight repurchase agreements. In these deals, creditors hold bank assets as collateral. The table below shows the year-end financing of six broker-dealer banks (amounts in sterling pounds).
Banks
| A | B | C | D | E | F | |
|---|---|---|---|---|---|---|
| Instruments owned | 896 million | 745 million | 630 million | 700 million | 962 million | 1.23 billion |
| Pledged as collateral | 229 million | 121 million | 280 million | 310 million | 151 million | 280 million |
Suppose repo creditors raise questions regarding the solvency of the abovementioned banks: Which bank will be most vulnerable to a liquidity crisis?
A
Bank A
B
Bank E
C
Bank F
D
Bank C
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