The correct answer is C. Bank A should fund today's shortfall in legal reserves through the Fed Funds Market and Bank B should fund its CD shortfall through borrowing from the Federal Home Loan Banks Advances Program. The bank can match fund its mortgages against the Advance Program funding term.

Bank A is facing a shortfall in legal reserves for the day, which is a short-term liquidity issue. The Fed Funds Market is an appropriate source for addressing short-term funding needs as it allows banks to borrow and lend reserves overnight. This market provides immediate access to funds, which is crucial for Bank A to cover its legal reserve requirements for the day.

Bank B, on the other hand, is experiencing a shortfall in long-term CD renewals due to local competition for retail deposits. This is a longer-term funding issue, and the Federal Home Loan Banks (FHLB) Advances Program offers a suitable solution. The FHLB provides long-term, low-cost funding to member banks, which can be used to match the term of the bank's mortgage portfolio. By borrowing from the FHLB, Bank B can secure stable, long-term funding to replace the lost CD funding and maintain its mortgage lending activities.

The other options are not as suitable for the specific funding needs of each bank:

• Option A suggests borrowing from the wholesale deposit market for both banks, which is a deposit funding source and does not differentiate between the short-term and long-term funding needs of Bank A and Bank B.
• Option B proposes using the commercial paper (CP) market for both banks, which is a short-term funding source and not ideal for Bank B's long-term CD shortfall.
• Option D recommends issuing debentures for Bank A and using the CP market for Bank B, which again does not address the specific short-term and long-term funding needs of each bank.

In summary, the most appropriate funding response for each institution, considering timing and the availability of non-deposit funds, is for Bank A to borrow from the Fed Funds Market and for Bank B to borrow from the Federal Home Loan Banks Advances Program. This approach addresses the specific short-term and long-term funding challenges faced by each bank and allows them to continue their operations effectively.