Depository banks:
A)buy short-term securities from investors, change their maturity, and sell them as long-term securities to other investors.
B)buy long-term securities from investors, change their maturity, and sell them as short-term securities to other investors.
C)accept short-term deposits from depositors and use them to make long-term loans.
D)accept long-term deposits from depositors and use them to make short-term loans.

Question

Quizplus · Accepted Answer

Depository banks accept short-term deposits from depositors and use them to make long-term loans. This practice is known as maturity transformation, where banks take advantage of the difference between short-term and long-term interest rates. They incur liabilities with short-term maturities and use the proceeds to fund assets with longer maturities. This process allows banks to earn a profit by earning a higher interest rate on their loans than they pay to depositors. Option A is incorrect because banks can change the maturity of securities, but they do not sell them to different investors. Option B is incorrect because it is the opposite of what banks do. Option D is incorrect because banks cannot use long-term deposits to make short-term loans without incurring significant liquidity risk.

Depository Banks