Explanation:
The 'used capacity to total borrowing capacity' ratio is a measure of the borrowing capacity available to a financial institution. It is calculated based on the used capacity relative to the total borrowing capacity. This ratio is crucial as it provides insights into the extent to which the institution has utilized its borrowing capacity. A higher ratio indicates that the institution has used a larger portion of its total borrowing capacity, which could potentially signal a higher risk of liquidity issues. Conversely, a lower ratio suggests that the institution has a larger unused borrowing capacity, indicating a lower risk of liquidity problems.
Choice B is incorrect. This choice refers to the liquidity coverage ratio (LCR), which measures the cushion that liquid assets offer over obligatory funding needs and can be used to track the level of liquid assets available to offset volatile funding.
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Q.4075 An institution must monitor a suite of liquidity health ratios besides reviewing macroeconomic and industry measures as part of a CFP framework. These ratios aid in quantifying the impact of liquidity risks and supporting decision making on the CFP actions under consideration. The used capacity to total borrowing capacity is one of the liquidity health ratios. Which of the following accurately describes this measure?
A
Measures the borrowing capacity available to the institution, based on used capacity relative to the total borrowing capacity
B
Measures the cushion that liquid assets offer over obligatory funding needs and can be used to track the level of liquid assets available to offset volatile funding
C
Measures the exposure to credit facilities that may be required at a future date
D
Measures the funding and borrowing enough to finance the institution’s increased lending banking activities
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