Which of the following statements is true?

Which of the following statements is true?

I. It is sufficient to ensure that a parent entity has sufficient excess liquidity to cover a liquidity shortfall for a subsidiary.

II. If a parent entity has a shortfall of liquidity, it can always rely upon any excess liquidity that its foreign subsidiaries might have.

III. Wholesale funding sources for a bank refer to stable sources of funding provided by the central bank.

IV. Funding diversification refers to diversification of both funding sources and funding tenors.
A . IV
B . III and IV
C . I and III
D . I and IV

View Answer

Answer: A

Explanation:

It is not generally sufficient to ensure the adequacy of liquidity across a group – ie it is not appropriate to just add up the sources and needs for liquidity across multiple entities in a group. This is because there can be restrictions on transferring liquidity between entities, particularly when the entities are located across borders. In cases where transfers of liquidity are permitted, there may be settlement delays in transferring funds from one entity to another. Therefore both statements I and II are incorrect.

Wholesale funding sources refers to the temporary interbank funding sources that need to be rolled over on very short intervals, often as short as overnight. These are not stable sources for long term funding. Statement III is therefore false.

Statement IV is correct as funding diversification refers to diversification of both funding sources and the duration for which the amounts are borrowed, ie tenor diversity. Statement IV is the only correct statement and therefore Choice ‘a’ is the correct answer.