A depository institution can make highly illiquid and long-maturity loans with funds obtained by issuing transaction deposits because

Question

Quizplus · Accepted Answer

Depository institutions rely on the predictability of depositor behavior, which allows them to manage the liquidity risk associated with making long-term, illiquid loans while funding these loans with short-term, liquid deposits. This concept is part of the liquidity management practices in banking, where banks count on the fact that not all depositors will withdraw their funds at the same time, allowing the bank to commit to longer-term investments and loans.

A Depository Institution Can Make Highly Illiquid and Long-Maturity Loans