The challenge of liquidity management is to maintain enough liquidity to avoid a crisis but to sacrifice no more earnings than absolutely necessary.

Question

BlackTom AI · Accepted Answer

The statement presents a viewpoint on liquidity management, highlighting two core objectives: maintaining enough liquidity to avoid a crisis and not sacrificing more earnings than necessary.

Option: True. This reflects mainstream financial management thinking, where firms aim to balance liquidity risk and opportunity cost. The first part acknowledges the importance of liquidity to prevent solvency or funding crises, ensuring that the firm can meet short-term obligations. The second part emphasizes minimizing the blot of liquid assets on earnings, recognizing that holding excess liquidity or converting assets to cash often incurs foregone returns. In practice, liquidity management seeks an optimal balance where the cost of holding liquidity is weighed against the risk and potential cost of illiquidity during stress periods.

Option: False. If we treat this option as a potential belief, it would imply that liquidity management should ignore earnings implications, or that liquidity should always be maximized regardless of cost. This is inconsistent with standard financial management, which emphasizes trade-offs between liquidity and profitability. Excessive liquidity can lead to a lower return on assets, while insufficient liquidity increases default risk and financing costs. Therefore, labeling the statement as false would contradict the well-established relationship between liquidity risk, crisis avoidance, and the opportunity costs of tying up funds.

In summary, the statement aligns with the fundamental trade-off concept in liquidity management, recognizing the dual aim of crisis avoidance and minimizing earnings sacrifice, whereas the alternative would ignore these essential trade-offs and is inconsistent with prudent financial practice.

FINS5530-Financial Institution Mgmt - T3 2025

The challenge of liquidity management is to maintain enough liquidity to avoid a crisis but to sacrifice no more earnings than absolutely necessary.

View Explanation

Log in for full answers

Similar Questions

"Stored liquidity" management refers to:

Stored liquidity management is a liability-side adjustment to the balance sheet to cover a deposit drain.

Purchased liquidity management is a liability-side adjustment to the balance sheet to cover a deposit drain.

A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is

Managing liabilities as a means of managing liquidity risk involves the trade-off between lower funding cost and higher risk of withdrawals.

Which of the following balance sheet entries is not a tool used in purchased liquidity management?

How can non-banks hold liquid assets

Which of the following observations is NOT true?[Fill in the blank]

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler