FRM Part I · FRM Exam Part I · Banks
Which activity best illustrates the bank function of maturity transformation?
Funding multi-year loans with demand deposits is maturity transformation, because the bank converts short-term liabilities into long-term assets. This creates liquidity and rollover risk. Underwriting, FX forwards and payment settlement are different bank services rather than maturity transformation.
- AUsing demand deposits to fund multi-year loansCorrect
- BUnderwriting a bond issue for a corporate client and selling it to investors
- CProviding a foreign exchange forward to a corporate customer
- DSettling payments between customers through a clearing system
Explanation
Maturity transformation means funding long-term assets with shorter-term liabilities. Demand deposits financing multi-year loans is the classic example. Underwriting, forwards and payment settlement are other services.
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