When shadow banks engage in maturity transformation, they raise funds by _____ and invest in _____.
A)issuing stock; stock of other companies
B)selling bonds; Treasury bills
C)borrowing in short-term credit markets; longer-term speculative investments
D)borrowing in long-term credit markets; short-term speculative investments

Question

Quizplus · Accepted Answer

Shadow banks engage in maturity transformation by borrowing funds in short-term credit markets (low-cost and easily accessible) and investing in longer-term speculative investments (higher yields but higher risk). This process can result in a liquidity mismatch if the short-term funding sources dry up, leading to potential financial instability.

When Shadow Banks Engage in Maturity Transformation, They Raise Funds