Explanation:
C is correct. Maturity and liquidity transformation ALM strategies supported by ample buffers of cash and highly liquid assets can be used to maximize bank net interest margin.
A is incorrect. Shorter-term forms of wholesale funding such as commercial paper are less reliable and potentially more concentrated sources of longer-term liquidity than a solid deposit base.
B is incorrect. Matching the maturity of a bank’s assets with the maturity of its liabilities would reduce its net interest margin. By engaging in maturity transformation and liquidity transformation which have longer term maturities of assets than the maturities of liabilities can result in increased net income.
D is incorrect. No asset-liability management system can fully protect a fractional-reserve bank against a general loss of confidence in its ability to pay out depositors. As long as the bank has liabilities it is obligated to repay at par and on demand, no degree of liquidity that a bank can achieve through liquidity or maturity transformations can protect it completely against a run.
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A
Short-term wholesale funding is the most reliable and least concentrated source of borrowing available to banks when employing liquidity ALM strategies.
B
Matching the maturity of bank assets with the maturity of bank liabilities is the most appropriate ALM strategy for maximizing the bank’s net interest margin.
C
Liquidity and maturity transformation strategies supported by ample buffers of cash and highly liquid assets can be used to maximize the bank's net interest margin.
D
Liquidity and maturity transformation strategies can fully insulate the bank against any non-renewals of short-term debt or depositor runs on the bank.