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

Question

BlackTom AI · Accepted Answer

The question presents a true/false statement about purchased liquidity management (PLM) and its relation to the balance sheet. 
Option True: The idea behind purchased liquidity management is to secure additional liquidity in times of funding stress, typically by accessing external funding sources. This is conceptually tied to the liability side of the balance sheet because it involves obligations to repay borrowed funds or committed facilities that would be drawn upon to cover a deposit drain. Therefore describing PLM as a liability-side adjustment to cover a deposit drain aligns with its purpose of ensuring liquidity by arranging external funding commitments. 
Option False: If one thought PLM were an asset-side measure or not related to liability management, they would be missing that PLM generally involves securing external funds or facilities that create potential liabilities, not assets, and is designed to address deposit withdrawals and other liquidity outflows. This interpretation would misconstrue the mechanism and misclassify the effect on the balance sheet. 
In summary, recognizing PLM as a liability-side adjustment to bolster liquidity during deposit drains is consistent with liquidity risk management practices, whereas rejecting this view overlooks the funding commitments and potential borrowings that arise during such arrangements.

FINS5530-Financial Institution Mgmt - T3 2025

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

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