Asset transformation can be described asA) borrowing long and lending short.B) borrowing short and lending long.C) borrowing and lending only for the short term.D) borrowing and lending for the long term
Question
Asset transformation can be described asA) borrowing long and lending short.B) borrowing short and lending long.C) borrowing and lending only for the short term.D) borrowing and lending for the long term
Solution
Asset transformation can be described as B) borrowing short and lending long. This is a common practice in financial institutions like banks. Here's how it works:
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Banks borrow funds for a short term. This is done by accepting deposits from customers, which can be withdrawn at any time, hence making it a short-term borrowing.
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Banks then use these borrowed funds to provide loans to businesses and individuals. These loans are usually for a longer term.
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The difference in interest rates between the short-term borrowings (deposits) and long-term lendings (loans) is where banks make their profit.
So, in essence, banks are transforming short-term liabilities (deposits) into long-term assets (loans), hence the term "asset transformation".
Similar Questions
9. Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed. 10. Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long. C) borrowing and lending only for the short term. D) borrowing and lending for the long term.
The example of asset transformation function of financial institutions is Group of answer choicestransferring of funds from one generation to another.investing short-term funds in off-balance sheet activities.transforming short term sources of funds into long term investments by taking short term deposits to fund long term loans.receipt of securities through electronic payments systems.
The asset transformation function can explain the situation that A.banks can operate at a low level of financial leverage.B.the liability structure of bank balance sheets tends to reflect a shorter maturity structure than does the asset structure.C.the use of off-balance-sheet activities will always reduce the risk to commercial banks.D.FIs can offer trust services. E.FIs can provide transaction services as well as advisory services to their customers.
With regard to asset transformation, financial intermediaries are able to provide deficit units with diverse loan products and at the same time satisfy the varying preferences of investors offering them a range of deposit products. Question 3Select one: True False
The asset transformation function potentially exposes the FI to A.foreign exchange risk.B.interest rate risk.C.technology risk.D.operational risk.E.trading risk.
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