Question

All of the following are essential importance of liquidity and liquidity management to financial institutions EXCEPT:

Select one:

a.

Safeguard against potential bank closure

b.

Promote demands for funds

c.

Avoid disposal of safer, more liquid assets

d.

Prevent loss in borrowing power

Answer 1

Banks needs liquidity to safeguard themselves from any event in the future , which may result in the closure of the bank due to liquidity crunch and failure of the banks to fulfil financial obligations.

Banks need liquidity, so that in the any unforeseen event, the banks do not have to dispose there most liquid assets in order to create liquidity, and suffer large financial losses in the event of any financial difficulty. Banks do not also want to lose their lenders to deposit funds into the banks. The banks with less liquidity, may not attract lenders or traders carrying out trading and lending activities with the bank.

So, the correct option is option B.

In times of liquidity banks demand funds, if it is available even the bank then it will be able to reduce it's losses by selling it's most liquid assets and borrowing funds for other financial institutions.