Question

Which of the following generally cause liquidity crises? assets no longer match liabilities

stock market collapse

irrational panic on the part of the banking public

bank runs

Answer 1

When there is an Asset Liability mismatch that means that the Asset are going to mature in the long run while deposit have to be paid off in the short-term, so there would be mismatch on the part of payment from the bank. This will cause a liquidity crisis in overall financial sector as a bank would not have any Liquidity to dispose off it's liabilities which are arising from deposits in the short-term. This will eventually lead to a liquidity crisis.

Stock market collapse or irrational panic on the part of the banking sector or Bank run are not the causes of liquidity crisis.

Hence the correct answer is option ( A) asset no longer match liabilities