Certified Financial Management Specialist Practice Exam

What does a bank primarily focus on when determining liquidity risk?

1. Ability to attract new customers

2. Ability to convert assets to cash quickly

3. Stability of loan portfolios

4. Market expansion opportunities

The correct answer is: Ability to convert assets to cash quickly

When assessing liquidity risk, a bank's primary focus is on its ability to convert assets to cash quickly. Liquidity risk refers to the potential difficulty in fulfilling financial obligations when they come due without incurring significant losses. Therefore, a bank needs to ensure that it can access cash readily, whether through selling assets or other means. This capability directly affects the institution's overall financial health and its ability to operate smoothly during various economic conditions. The other options, while relevant to a bank's overall strategy, do not address liquidity risk as directly. Attracting new customers relates more to growth and market share than immediate cash availability. The stability of loan portfolios is crucial for credit risk management but does not specifically pertain to the liquidity needed to meet short-term liabilities. Market expansion opportunities focus on strategic growth rather than on the fundamental ability to manage cash flow effectively. All these aspects are important for a bank's overall operations, but in the specific context of liquidity risk, the ability to convert assets to cash quickly is the most critical factor.