Answer the following practice questions

1. Outline the standard operating features that allow Financial Institutions (FIs) to deal with liquidity risk when economic activity is considered normal. In times of extreme liquidity crises, what market reality can produce serious financial problems?

2. (a) Outline and describe the benefits of off-balance-sheet activities to an FI. Identify the risks created by these activities and provide details as to how these risks can produce fluctuating levels of financial problems for the FI in the future. (b) How do financial institutions spread risks among the instruments that they hold?

3. Identify the disparities between operational risk and technology risk. Do you think that operational risk will increase if payment systems are internationalized among banks? Why or why not?

4. (a) What are the links among the various areas of risk exposure by FIs? If an FI employs a model to manage and measure one type of risk, why would this be an incomplete approach to limiting exposure to risks? (b) Assume that you are responsible for liquidity management and reserves at a bank that you are managing. The Central Bank has taken the decision not to pay interest on excess reserves, which you may be holding there. You decide that you will only hold required reserves with the Central Bank. Outline the costs that you will bear if deposit outflows occur, and you have insufficient reserves. Would you borrow from other banks, sell loan portfolios, or sell some securities?