To satisfy shareholder demands for higher returns, a commercial bank decides to restructure its asset portfolio. However, the regulatory authorities warn that this restructure must not excessively compromise the bank’s liquidity. Which of the following balance sheet reallocations would increase the bank’s profitability but simultaneously raise its liquidity risk?
Selling £50 million\pounds 50\text{ million}£50 million of liquid government bonds to fund £50 million\pounds 50\text{ million}£50 million of new long-term mortgages.
Raising £100 million\pounds 100\text{ million}£100 million by issuing new equity shares and holding the proceeds as balances at the central bank.
Replacing £40 million\pounds 40\text{ million}£40 million of high-yield unsecured personal loans with £40 million\pounds 40\text{ million}£40 million of short-term Treasury bills.
Borrowing £80 million\pounds 80\text{ million}£80 million from the central bank's discount window to increase its cash reserves.
18 exam-style questions on OCR A Level Economics The financial sector. Each one has a worked solution and a mark scheme showing where the marks go.