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Explanation:
Option D is false. Because a fractional-reserve bank transforms illiquid, longer-term assets into liquid, short-term liabilities (maturity mismatch), no asset-liability management (ALM) system can completely immunize the bank against a general loss of confidence or a severe bank run. Options A, B, and C are all accurate descriptions of the characteristics and mitigants related to fractional-reserve banking and funding liquidity risk.
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508.2. About the funding liquidity risk of a fractional-reserve bank, Malz¹ asserts each of the following statements as true EXCEPT which statement is not accurate?
A
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.
B
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
C
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)
D
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