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

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BlackTom AI · Accepted Answer

The question asks for a disadvantage of using purchased liquidity management to manage a financial institution's liquidity risk.
Option A: the accessibility of international money markets. This is generally considered a potential advantage, since access to broader markets can improve liquidity options; thus it is not a disadvantage.
Option B: the relatively high cost of purchased liabilities. This is commonly cited as a key drawback of relying on purchased liquidity: higher funding costs can erode net interest margins and profitability, making this a valid disadvantage.
Option C: the resulting shrinkage of the FI's balance sheet. Purchased liquidity typically increases or stabilizes the balance sheet by adding liabilities or contingent funding; shrinkage is not a standard consequence, so this is not a typical disadvantage.
Option D: loss of flexibility as a result of dependence upon purchased liabilities. Depending on external funding sources can reduce an FI’s strategic and operational flexibility, since it becomes more beholden to market conditions and terms set by counterparties; this is a recognized disadvantage.
Option E: tax considerations. While taxes can be a factor in any funding decision, this is not generally identified as a primary disadvantage specific to purchased liquidity management, so it is less compelling as the main drawback compared to cost and flexibility.
In summary, among the options, the most direct and widely acknowledged disadvantage is the relatively high cost of purchased liabilities (Option B), with Option D also describing a meaningful downside, while A, C, and E are less representative of the core issues associated with purchased liquidity management.

FINS5530-Financial Institution Mgmt - T3 2025

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

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