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ACCA Applied Skills · Financial Management · The nature and role of financial markets and institutions

A bank takes many small, short-term deposits and makes a smaller number of large, long-term loans. Which function of financial intermediaries is this MOST clearly an example of?

This is maturity transformation combined with aggregation of funds. The bank turns many small short-term deposits into fewer large long-term loans, meeting borrowers' needs for size and term that individual savers could not supply directly.

  1. ARisk transformation only
  2. BMaturity transformation and aggregation of fundsCorrect
  3. CCurrency conversion
  4. DUnderwriting of new share issues

Explanation

Pooling many small deposits into large loans is aggregation (size transformation), and converting short-term deposits into long-term loans is maturity transformation. Risk transformation is also present in diversification, but option A omits the maturity and size features described. The scenario does not involve currency or underwriting.

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