Question

A rumor starts that says a bank has suffered significant losses and may not be able to honor its promises to depositors. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposits. This is an example of:
A. Liquidity riskB. Operational riskC. Interest rate riskD. Credit risk

Answer 1

Answer:

A. Liquidity risk

Explanation:

Since in the question it is mentioned that the rumor has started stated that the bank has suffered significant losses due to which they are unable to honor their promises to depositors with resulted that the depositors withdraw their deposit in the next morning.

This situation represents the liquidity risk as the bank is not able to repay its short term obligations or debt due to which they have been suffered from the losses as it is a situation when the current assets are not converted into the cash within 12 months.