Which of the following assets on the bank’s balance sheet has greatest endogenous liquidity risk?

Which of the following assets on the bank’s balance sheet has greatest endogenous liquidity risk?
A . A 2-year U.S treasury bond
B . A 1-week corporate loan with a AAA rated company
C . A 10-year U.S treasury bond
D . A 3-year subprime mortgage

View Answer

Answer: D

Explanation:

Endogenous liquidity risk refers to the risk arising from the inherent characteristics of the asset itself, which can affect its liquidity under stress conditions.

A 2-year U.S. Treasury bond (Option A) and a 10-year U.S. Treasury bond (Option C) are both highly liquid because they are backed by the U.S. government and have deep, well-functioning markets.

A 1-week corporate loan with a AAA-rated company (Option B) has high credit quality and a short duration, making it relatively liquid.

A 3-year subprime mortgage (Option D), however, carries significant credit risk and is less liquid due to its lower credit quality and the potential for higher default rates, particularly under stress conditions. This makes it the asset with the greatest endogenous liquidity risk.

References Based on information on liquidity risks and the inherent risk characteristics of various assets as discussed in the document??.