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

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BlackTom AI · Accepted Answer

In analyzing purchased liquidity management, it helps to list common tools banks use to manage short-term funding and liquidity.

A. Repurchase agreement: A repo is a short-term secured borrowing arrangement where the bank sells securities with an agreement to repurchase later. It is a classic liquidity-management instrument because it provides immediate funds and a predictable cost of funds.

B. Bonds: Bonds can be used as liquid assets that a bank can sell or use as collateral in funding transactions. They serve as a source of liquidity when the bank needs to raise cash quickly, or as investment securities that can be liquidated.

C. Demand deposit: Demand deposits represent customer funds held by the bank that can be withdrawn on demand. While they are a liability that affects liquidity risk, they are not a tool that the bank actively uses to manage purchased liquidity in the sense of obtaining funding or managing short-term liquidity positions; they are a source of funding that the bank must manage, not a financing instrument the bank uses to obtain liquidity. In other words, demand deposits are funds on hand from customers, not a dedicated liquidity-management technique.

D. Subordinated note: A subordinated note is a debt instrument that can be used to raise additional capital or liquidity, particularly in times of need, and it can contribute to liquidity management by providing a more flexible funding source.

E. Federal fund (or federal funds): Federal funds purchased are short-term borrowings between banks to cover liquidity needs, making them a direct tool for liquidity management.

Thus, among the listed entries, demand deposit stands out as not aligning with the narrow category of liquidity-management tools banks actively use for purchased liquidity; the other items function as funding or liquidity-raising instruments.

FINS5530-Financial Institution Mgmt - T3 2025

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

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