CMA Intermediate · Financial Management and Business Data Analytics · Financial Institutions
A financial system channels savings of households into investment by firms through banks, which pool small deposits and make large loans of different maturities. Which function of the financial system is chiefly illustrated by banks converting short-term deposits into long-term loans?
The function illustrated is maturity transformation. Banks fund long-term loans using short-term deposits, matching savers' liquidity needs with borrowers' long-term needs. This is a core intermediation role of financial institutions, distinct from price discovery, payment settlement or hedging.
- AMaturity transformationCorrect
- BPrice discovery
- CPayment settlement
- DPortfolio hedging through derivatives
Explanation
Banks accept short-term liabilities (deposits) and create longer-term assets (loans). This is maturity transformation, a core intermediation function. Price discovery relates to markets setting asset prices, and settlement relates to clearing payments.
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