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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Mahanadi Bank funds long-term housing loans mostly through short-term wholesale deposits. A sudden withdrawal by large depositors leaves it unable to meet payment obligations on time without selling assets at a steep discount. Which risk is chiefly illustrated?

This is liquidity risk. The bank cannot meet payment obligations when due without selling assets at heavy discounts, because short-term funding finances long-term loans. It is not driven by borrower default, legal disputes or currency movements.

  1. ALiquidity riskCorrect
  2. BCredit risk
  3. CLegal risk
  4. DForeign exchange risk

Explanation

Liquidity risk is the inability to meet obligations as they fall due without unacceptable losses. The mismatch between short-term funding and long-term assets, combined with sudden withdrawals, creates it. Borrower default, legal disputes or currency moves are not the cause here.

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