Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The process in which banks convert large quantities of short-term, low risk, small and liquid deposits into a small number of much larger, long-term, riskier

The process in which banks convert large quantities of short-term, low risk, small and liquid deposits into a small number of much larger, long-term, riskier and illiquid advances (loans). This is how individual banks make majority of their profits by transforming assets to meet the incompatible needs and wants of borrowers and lenders simultaneously. The main risk with this type of approach for banks, is if a large long term loan is funded by a large number of small short term deposits, the bank may experience problems meeting the demands of depositors if large numbers decide to withdraw their deposit. In this situation the mismatch between the terms of depositors and borrowers is problematic as the loans may not be redeemable in the short term and this creates liquidity issues i.e. there may not be enough cash immediately available to allow depositors to withdraw their savings

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Research In Forest Economics And Forest Policy

Authors: Marion Clawson

1st Edition

1317362624, 9781317362623

More Books

Students also viewed these Economics questions

Question

What is forensic accounting?

Answered: 1 week ago

Question

The number of people commenting on the statement

Answered: 1 week ago

Question

Peoples understanding of what is being said

Answered: 1 week ago