Which intermediation function results in an FI's exposure to liquidity risk?
A)Information production.
B)Asset transformation.
C)Conduit for monetary policy.
D)Lender of last resort.

Question

Quizplus · Accepted Answer

Asset transformation involves borrowing short-term funds to invest in longer-term assets, which exposes FIs to liquidity risk. If short-term funding sources dry up or interest rates rise, the FI may struggle to meet its obligations. The other options listed do not necessarily result in exposure to liquidity risk.

Which Intermediation Function Results in an FI's Exposure to Liquidity