The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may
A)penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk.
B)benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk.
C)lead to increased withdrawals by depositors that do not meet the minimum requirement.
D)assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations.

Question

Quizplus · Accepted Answer

Constrained optimization involving the minimum amount of liquid reserve assets required by regulators may penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk. This is because if the FI does not maintain the minimum required liquid reserve, it may not have enough funds to meet unexpected withdrawal demands, which can lead to liquidity problems and possible insolvency. Therefore, the FI manager may have to maintain a higher amount of liquid reserve assets than the minimum stipulated by regulators to adequately manage the withdrawal risk.

The Concept of Constrained Optimization Facing an FI Manager Involving