Explanation:
Funding liquidity risk, also referred to as balance sheet risk, is the risk that a financial institution will be unable to raise the cash necessary to roll over its debt, to fulfill cash, margin, or collateral requirements, or to meet capital withdrawals (such as sudden and massive customer deposit withdrawals). Transactions liquidity risk relates to the inability to buy or sell an asset without a significant adverse price move. Therefore, from an analyst's perspective, this represents balance sheet risk.
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Q.70 Banks borrow short (i.e., take on customers deposits) and lend long (i.e., issue mortgages). This process is known as maturity transformation. During the 2007-2008 financial crisis, many banks fell because they were unable to meet the demand of customers wishing to withdraw their deposits. From an analyst’s perspective, this is most likely to represent:
A
Balance sheet risk
B
Transactions liquidity risk
C
Systemic risk
D
Maturity transformation risk