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

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The statement presents a claim about stored liquidity management being a liability-side adjustment to the balance sheet to cover a deposit drain.
Option 1 (True): This is not accurate because stored liquidity management is not exclusively or primarily a liability-side adjustment. While liquidity management involves addressing potential deposit drains, the concept of stored liquidity typically relates to maintaining and managing liquid assets and buffers (an asset-side consideration) to ensure liquidity during stress. Focusing only on liability-side adjustments ignores the asset-side liquidity reserves that banks rely on.
Option 2 (False): This is the correct approach because stored liquidity management generally encompasses reserves and high-quality liquid assets held to meet withdrawals and cash outflows, which are asset-side tools. Although liability management (e.g., managing deposit levels) is part of overall liquidity risk management, describing stored liquidity as solely a liability-side adjustment misrepresents the broader practice of holding liquid assets to cover liquidity needs. The distinction helps avoid the misconception that liquidity coverage is only about deposits; it also relies on the asset base and available liquid resources.
In summary, the statement is false because stored liquidity management involves asset-side liquidity buffers in addition to any liability considerations, and it is not exclusively a liability-side adjustment designed only to cover a deposit drain.

FINS5530-Financial Institution Mgmt - T3 2025

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

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