The correct answer is C.

Many banks are largely short-term borrowers (via deposits), so their capacity to maintain long-term positions and their flexibility when circumstances or expectations change is limited. If the bank uses deposits to fund long-term loans, there’s a big possibility that it will not have cash readily available as and when the depositor comes calling.

Things to Remember

• Funding liquidity risk is the risk that a company or financial institution will be unable to meet its short-term financial obligations due to an inability to liquidate assets or obtain funding at a reasonable cost.
• Short-term deposits are typically more volatile and can be withdrawn by depositors on short notice, leading to funding liquidity issues if they are used to fund long-term loans.
• Long-term deposits are more stable sources of funding as they have longer maturity periods, providing more certainty for the bank's funding needs.
• Matching the maturity of assets and liabilities is an important aspect of liquidity risk management to ensure that the bank can meet its obligations without incurring losses.
• Banks need to maintain a balance between short-term and long-term funding sources to manage liquidity risk effectively.