Explanation:
The widening spreads reflect a diminished market confidence in the bank, leading to an increase in the cost of funding. Widening spreads indicate that investors are demanding higher yields or compensation for the perceived increase in risk associated with lending to the bank. This can potentially strain the bank's liquidity position as it becomes more expensive for the bank to borrow or raise funds.
B is incorrect. A rapid expansion of assets funded by unstable liabilities as opposed to stable liabilities would pose greater concerns.
C is incorrect. A bank-specific early warning indicator (EWI) that would be more relevant is a decline in the bank's stock price compared to that of its peers as opposed to no decline in the bank's stock price.
D is incorrect. In the context of banking and financial institutions, the hedge ratio is not the most appropriate indicator of liquidity risk.
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Q.5376 When evaluating ABC Bank's liquidity profile, what particular trends should John Doe, a risk consultant, prioritize as the most prominent warning sign indicating potential liquidity risk at the bank?
A
The spreads on the bank's issued debt and credit default swap have widened.
B
There has been substantial growth in assets, which has been financed by an expansion in stable liabilities.
C
While the stock price of the bank's peers has declined, there has been no corresponding decrease in the stock price of the bank itself.
D
The bank's hedge ratio has fallen below 1, indicating difficulties in meeting short-term obligations.