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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

In the context of financial intermediation and risk, which activity best describes the 'maturity transformation' performed by a commercial bank?

Maturity transformation is a bank funding long-term assets, such as term loans, with short-term liabilities, such as deposits. It creates liquidity and interest rate risk because liabilities reprice or can be withdrawn sooner than the loans are repaid.

  1. AFunding long-term loans with short-term depositsCorrect
  2. BFunding short-term loans with long-term equity only
  3. CConverting foreign currency loans into domestic currency loans through swaps
  4. DPooling many insurance policies to reduce claim variability

Explanation

Maturity transformation means borrowing short (demand and short-term deposits) and lending long (mortgages, term loans). This creates liquidity and interest rate risk. Pooling policies is risk pooling by insurers, and currency conversion is not maturity transformation.

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