Module: | MODULE B: RISK MANAGEMENT
Q455: Consider the following statements regarding the traditional "Stock Approach" metrics used for measuring liquidity risk in commercial banks:
1. The ratio of Core Deposits to Total Assets indicates the extent to which a bank's total assets are funded by stable, long-term retail deposits.
2. A rising ratio of Volatile Liabilities to Total Assets signifies an improvement in the bank's liquidity risk profile.
3. The Stock Approach relies purely on future projected cash flows rather than analyzing the current balance sheet snapshot.
Which of the statements given above is/are correct?
2. A rising ratio of Volatile Liabilities to Total Assets signifies an improvement in the bank's liquidity risk profile.
3. The Stock Approach relies purely on future projected cash flows rather than analyzing the current balance sheet snapshot.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Core Deposits to Total Assets ratio is a fundamental Stock Approach metric.
It measures funding stability by revealing the percentage of total assets comfortably financed by highly stable, "sticky" core retail deposits that are unlikely to run off during a crisis.
Statement 2 is incorrect: Volatile liabilities (like short-term wholesale borrowings) are highly susceptible to sudden withdrawal.
A rising ratio of Volatile Liabilities to Total Assets strictly indicates a deterioration in the bank's liquidity profile, not an improvement.
Statement 3 is incorrect: The Stock Approach relies explicitly on a static, current snapshot of the balance sheet to compute structural ratios at a specific point in time.
It is the Flow Approach (like the Structural Liquidity Statement) that relies on the dynamic mapping of future projected cash inflows and outflows.
It measures funding stability by revealing the percentage of total assets comfortably financed by highly stable, "sticky" core retail deposits that are unlikely to run off during a crisis.
Statement 2 is incorrect: Volatile liabilities (like short-term wholesale borrowings) are highly susceptible to sudden withdrawal.
A rising ratio of Volatile Liabilities to Total Assets strictly indicates a deterioration in the bank's liquidity profile, not an improvement.
Statement 3 is incorrect: The Stock Approach relies explicitly on a static, current snapshot of the balance sheet to compute structural ratios at a specific point in time.
It is the Flow Approach (like the Structural Liquidity Statement) that relies on the dynamic mapping of future projected cash inflows and outflows.