Financial Risk Manager Part 2

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Explanation:

A bank's vulnerability to a liquidity crisis driven by repo creditors is highly correlated with its reliance on pledged collateral relative to its total owned financial instruments. We calculate the ratio of pledged assets to total owned assets for each bank:

Bank P: $258 / 656 \approx 39.3%$
Bank Q: $472 / 750 \approx 62.9%$
Bank R: $139 / 339 \approx 41.0%$
Bank S: $209 / 835 \approx 25.0%$ Bank Q has the highest proportion of assets pledged as collateral, meaning it has the lowest buffer of unencumbered assets to meet unexpected liquidity needs if repo creditors pull their funding. Therefore, Bank Q is the most vulnerable.

Explanation:

Bank P: $258 / 656 \approx 39.3%$
Bank Q: $472 / 750 \approx 62.9%$
Bank R: $139 / 339 \approx 41.0%$
Bank S: $209 / 835 \approx 25.0%$ Bank Q has the highest proportion of assets pledged as collateral, meaning it has the lowest buffer of unencumbered assets to meet unexpected liquidity needs if repo creditors pull their funding. Therefore, Bank Q is the most vulnerable.

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Question Large dealer banks have often financed significant fractions of their assets using short-term (overnight) repurchase agreements in which creditors hold bank securities as collateral against default losses. The table below shows the quarter-end financing of four A-rated broker-dealer banks. All values are in USD billion.

Financial instruments Bank P Bank Q Bank R Bank S
Owned 656 750 339 835
Pledged as collateral 258 472 139 209
Not pledged 398 278 200 626

In the event that repo creditors become equally nervous about each bank’s solvency, which bank is most vulnerable to a liquidity crisis?

Financial instruments	Bank P	Bank Q	Bank R	Bank S
Owned	656	750	339	835
Pledged as collateral	258	472	139	209
Not pledged	398	278	200	626

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Last updated: July 5, 2026 at 07:29

Bank P

Bank Q

Bank R

Bank S