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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
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.
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