Answer the following questions with the heading: Systemic Instability of the Banking Sector: Causes and Cures

• The determinants of liquidity risk and solvency risk and how they are interrelated (10/100).
  • Discuss how full convertibility can discourage undue liquidity risk taking and how full (unlimited) liability can discourage undue solvency risk taking.
• The difference as well as the overlap between the cash funding and balance sheet funding of banks (5/100).
• The role of the central banks elastic currency policy in the cash funding of the banking sector a whole. (10/100)
  • Discuss how currency elasticity lessens the sanctions on imprudent bank behaviour resulting from adverse biases in the pattern of their cash gains/losses, thereby creating moral hazard and encouraging imprudent risk taking.