If stored liquidity is used by a bank to fund a net deposit drain:[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Stored liquidity refers to a bank’s cash and highly liquid securities held to meet withdrawals and other short-term funding needs. The accounting identity Assets = Liabilities + Equity governs the balance sheet.

1) Relevant knowledge points and concepts
- Stored liquidity: cash/reserves or liquid securities on the asset side.
- Net deposit drain: customers withdraw deposits, reducing deposit liabilities.
- Balance sheet identity: any change must keep Assets = Liabilities + Equity.

2) Step-by-step reasoning
- A net deposit drain means deposit liabilities fall by the withdrawal amount.
- If the bank funds that drain from its stored liquidity, it pays out cash (or sells liquid assets) equal to the withdrawals.
- That action reduces an asset (cash or liquid securities) by the same amount the deposit liability falls.
- Both an asset and a liability decrease by the same amount, so total assets and total liabilities fall equally.

3) Calculations with intermediate steps (numeric example)
- Initial: Assets = Cash 100 + Loans 900 = 1,000. Liabilities = Deposits 800 + Other 0; Equity = 200. Assets = Liabilities + Equity = 1,000.
- Net deposit drain = 50, funded from stored liquidity (cash).
- After: Cash = 100 − 50 = 50 (asset); Deposits = 800 − 50 = 750 (liability).
- New totals: Assets = 50 + 900 = 950. Liabilities + Equity = 750 + 200 = 950.
- Total balance sheet size decreased by 50, equal to the net deposit drain.

4) Why the correct answer is correct
Because using stored liquidity reduces both assets (liquid holdings) and liabilities (deposits) by the same amount, the overall size of the balance sheet contracts by that amount.

5) Why other options are incorrect
- b: Incorrect — there is an effect: total assets and liabilities both fall.
- c: Incorrect — not only liabilities decrease; assets decrease too (stored liquidity used).
- d: Incorrect — assets do not increase; they decrease when used to fund withdrawals.
- e: Incorrect — the balance sheet does not increase; it shrinks by the withdrawal amount.

6) Conclusion
The balance sheet will decrease by the amount of the net deposit drain, confirming answer (a).

If stored liquidity is used by a bank to fund a net deposit drain:[Fill in the blank]单项选择题

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