A significant amount of legislation passed in the 20th century sought to reduce the risk of future economic events like the liquidity crisis experienced by banks during the Panic of 1907. Which of the following policies would increase the risk of a liquidity crisis?(1 point) Responses Banks in need of cash are offered low-interest loans from the Federal Reserve. Banks in need of cash are offered low-interest loans from the Federal Reserve. Banks in need of cash are offered low-interest loans from other banks. Banks in need of cash are offered low-interest loans from other banks. Banks are required to store a smaller percentage of depositor funds in their vaults. Banks are required to store a smaller percentage of depositor funds in their vaults. Banks are required to store a larger percentage of depositor funds in their vaults

Question

A significant amount of legislation passed in the 20th century sought to reduce the risk of future economic events like the liquidity crisis experienced by banks during the Panic of 1907. Which of the following policies would increase the risk of a liquidity crisis?(1 point) Responses Banks in need of cash are offered low-interest loans from the Federal Reserve. Banks in need of cash are offered low-interest loans from the Federal Reserve. Banks in need of cash are offered low-interest loans from other banks. Banks in need of cash are offered low-interest loans from other banks. Banks are required to store a smaller percentage of depositor funds in their vaults. Banks are required to store a smaller percentage of depositor funds in their vaults. Banks are required to store a larger percentage of depositor funds in their vaults

one answer

Answer 1

Banks are required to store a smaller percentage of depositor funds in their vaults.

Answer 2

Banks are required to store a smaller percentage of depositor funds in their vaults.

Answer 3

The policy that would increase the risk of a liquidity crisis is: "Banks are required to store a smaller percentage of depositor funds in their vaults."

To explain why this policy increases the risk, it is important to understand the concept of liquidity in the banking system. Liquidity refers to the ability of banks to meet their immediate cash obligations, such as honoring deposit withdrawals. When banks have a lower percentage of depositor funds stored in their vaults, it means they have less cash readily available to fulfill these obligations.

In times of economic stress or financial instability, there may be a higher demand for cash withdrawals from depositors. If banks do not have enough cash on hand to meet these demands, it can lead to a liquidity crisis. In such a scenario, banks may not be able to fulfill all withdrawals, which can erode depositor confidence and potentially trigger a cascade effect of bank runs and financial instability.

Therefore, requiring banks to store a smaller percentage of depositor funds in their vaults increases the risk of a liquidity crisis because it reduces the amount of readily available cash that banks have to meet depositor demands.