1. Bank A has a loans/deposits ratio of 10%. Bank B has a loans/deposits ratio of 90%. Which of the following statements are true?
a. Bank A is better because it has lower liquidity risk.
b. Bank A is lending out a lot of its funding.
c. If Bank A is near its borrowing limit, it could lead to future liquidity problems.
d. A loans/deposits ratio shouldn’t be too low because then the bank isn’t making money, however a high ratio means there could be liquidity risk in the future.
e. None of the above.
Please explain concept.
2. Which of the following regarding loan commitments is false?
a. Loan commitments are an off balance sheet activity, however it gets recorded on balance sheet when a business draws down on it.
b. A large amount of loan commitments causes high liquidity risk for banks because during economic downturns businesses all require more cash.
c. When a business draws down on a loan commitment, this is reflected on the liabilities side of the balance sheet of banks. On the asset side, cash decreases.
d. During the recent financial crisis, banks that had a lot of loan commitments had high liquidity risk because they didn’t have enough cash.
e. All of the above are true.