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You are the bank's liquidity manager. What should you do if the variability of deposit inflows...

You are the bank's liquidity manager. What should you do if the variability of deposit inflows and outflows increases and why? Answer this question by filling in the blanks. Please use the suitable word provided in the round brackets.

The risk of illiquidity  (increased/decreased/did not change). The cost of illiquidity  (increased/decreased/did not change). Therefore it makes sense to  (increase/decrease/ maintain) the ESF buffer. As a result your bank will provide  (more/less/the same) liquidity transformation for society.

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Answer #1

Increased

Increased

Increase

Less

Due to increase in variance in deposit inflows and outflows, risk of getting illiquidity will increase and cost of illiquidity will also increase. It will make bank to increase the buffer so that commitments are delivered. Though, it will cause less investments in illiquid investments in the society.

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