Financial Risk Manager Part 2

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About the funding liquidity risk of a fractional-reserve bank, Malz asserts each of the following statements as true EXCEPT which statement is not accurate?

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Funding liquidity risk arises for market participants who borrow at short term to finance investments that require a longer time to become profitable; the balance-sheet situation of a market participant funding a longer-term asset with a shorter-term liability is called a maturity mismatch.

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In theory, the core function of a commercial bank is to take deposits and provide commercial and industrial loans to non-financial firms. In doing so, the bank carries out transformations in liquidity, maturity, and credit; it transforms long-term illiquid assets (e.g., loans to businesses) into short-term liquid ones, including deposits and other liabilities that can be used as money.

Bank fragility can be mitigated through higher capital (which reduces depositors' concern about solvency, the typical trigger of a bank run), and higher reserves (which reduces concern about liquidity).

If a fractional-reserve bank carries out a liquidity and maturity transformation, and has liabilities it is obligated to repay at par and on demand, a properly calibrated asset liability management system can fully immunize (protect) the fractional-reserve bank against a general loss of confidence in its ability to pay out depositors.