Due to the nature of the fractional reserve banking, a bank
A)is always exposed to interest rate risk
B)is always exposed to credit risk
C)is always exposed to a risk that the amount withdrawn by depositors exceeds the amount of cash available
D)is never exposed to withdrawal risk
E)can always hedge its risk exposure

Question

Quizplus · Accepted Answer

Fractional reserve banking means that a bank only holds a fraction of its deposits in actual cash, while lending out the rest. This means that if there is a sudden demand for withdrawals by depositors, the bank may not have enough cash available to fulfill all the requests, leading to a liquidity crisis. This risk is inherent to the fractional reserve banking system, making choice C the correct answer. The other options are not necessarily always true for banks operating under a fractional reserve system.

Due to the Nature of the Fractional Reserve Banking, a Bank