17-49 Which type of financial intermediary is more highly exposed to liquidity risk?

Question

Quizplus · Accepted Answer

Depository institutions, such as banks, are more highly exposed to liquidity risk because they rely heavily on short-term funding sources, such as deposits, to fund long-term assets, such as loans. If depositors lose confidence in the bank and withdraw their funds, the bank may have difficulty meeting its obligations and could be forced to liquidate assets at fire-sale prices to raise the necessary funds. This can lead to a vicious cycle of declining asset values and further withdrawals, potentially leading to bank failure.

17-49 Which Type of Financial Intermediary Is More Highly Exposed