A disadvantage of using asset management to manage a bank's liquidity risk is:

Question

BlackTom AI · Accepted Answer

Asset management for bank liquidity means holding cash and highly marketable securities to meet withdrawals, and those instruments typically pay lower returns than less liquid loans or investments.

1) Relevant concepts: Asset management (or asset-side liquidity management) involves increasing a bank’s holdings of liquid assets—cash, reserves, Treasury bills, and short-term securities—to meet potential funding needs. Liability management (or purchased-liability strategies) involves obtaining funds by borrowing in money markets or issuing short-term liabilities. Liquid assets trade off yield for safety and convertibility; purchased liabilities trade off cost and potential dependence on markets.

2) Step-by-step reasoning:
- Identify what “using asset management to manage liquidity risk” implies: the bank preserves liquidity by holding more highly liquid assets.
- Determine the main consequence of holding more liquid assets: opportunity cost — these assets usually offer lower yields than longer-term or less liquid lending/investments.
- Compare answer choices against this consequence:

3) (Calculations not applicable) There are no numerical computations; the logic is qualitative trade-offs between yield and liquidity.

4) Why the correct answer is correct: Choice d—“the low yield earned on highly liquid assets”—directly states the principal disadvantage of asset-side liquidity management: reduced profitability because liquid assets (e.g., reserves, short-term government securities) pay lower interest than typical earning assets.

5) Why the other options are incorrect:
- a. “the high cost of purchased liabilities” describes a disadvantage of liability management, not asset management.
- b. “the accessibility of international money markets” is typically an advantage for raising funds (liability management), not a disadvantage of asset management.
- c. “loss of flexibility as a result of dependence upon purchased liabilities” again refers to liability management dependency, not the asset-management approach.

6) Conclusion: Therefore the best answer is d. the low yield earned on highly liquid assets, which matches the provided correct answer.

A disadvantage of using asset management to manage a bank's liquidity risk is:单项选择题

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