Suppose you are advising a bank on the management of its balance sheet. In light

Question

Suppose you are advising a bank on the management of its balance sheet. In light of the financial crisis of 2007-2009, what arguments might you make to convince the bank to hold additional capital?

During the financial crisis of 2007-2009, many banks failed and many more would have in the absence of government support. Holding additional capital will help avoid failure in the future by

A) guaranteeing additional profit

B) reducing solvency risk

C) increasing liquidity risk

D) increasing solvency risk

Explanation / Answer

B) reducing solvency risk

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