Because transactions deposits can be withdrawn at any time, banks are exposed to

Question

Quizplus · Accepted Answer

Transactions deposits are a major source of funding for banks, but they can be withdrawn by the customers at any time. This creates a liquidity risk for the banks, as they may not have enough cash reserves to meet the sudden increase in demand for withdrawals. Credit risk is the risk of default by borrowers, trading risk is the risk related to trading activities, and interest risk is the risk related to changes in interest rates. While all of these risks may also affect banks, liquidity risk is the most significant for transactions deposits.

Because Transactions Deposits Can Be Withdrawn at Any Time, Banks