b. What risk do banks face when they use maturity transformation? The risk comes from maturity transformation being used only by shadow banks and kept secret from customers, who might withdraw their funds if they learn it is being used. banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals. deposit insurance not guaranteeing deposits when the bank uses maturity transformation. long-term loans possibly not being paid back, leading to a bank failure.
b. What risk do banks face when they use maturity transformation? The risk comes from maturity transformation being used only by shadow banks and kept secret from customers, who might withdraw their funds if they learn it is being used. banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals. deposit insurance not guaranteeing deposits when the bank uses maturity transformation. long-term loans possibly not being paid back, leading to a bank failure.
Chapter7: Credit Cards And Consumer Loans
Section: Chapter Questions
Problem 4LTAI
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Question
![b. What risk do banks face when they use maturity transformation?
The risk comes from
maturity transformation being used only by shadow banks and kept secret from customers, who might withdraw their
funds if they learn it is being used.
banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals.
deposit insurance not guaranteeing deposits when the bank uses maturity transformation.
long-term loans possibly not being paid back, leading to a bank failure.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F24da47d3-5803-4106-b675-abaf3e8b7199%2F4e5fc431-ed60-474d-be5b-aee4461e03d4%2Fridd6sh_processed.png&w=3840&q=75)
Transcribed Image Text:b. What risk do banks face when they use maturity transformation?
The risk comes from
maturity transformation being used only by shadow banks and kept secret from customers, who might withdraw their
funds if they learn it is being used.
banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals.
deposit insurance not guaranteeing deposits when the bank uses maturity transformation.
long-term loans possibly not being paid back, leading to a bank failure.
![5 The Financial Sector - End of Chapter Problem
a. How does maturity transformation impact long-term investment spending?
Maturity transformation
decreases long-term investment by limiting the use of short-term deposits to short-term loans only.
increases long-term investment by making it possible to extend long-term loans even when no savers are willing to
make a long-term loan.
increases long-term investment by convincing savers to promise they will not withdraw their money for the length of
the loan.
increases long-term investment by having investors take out a series of short-term loans successively, repaying each
previous loan, until the long-term project is completed.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F24da47d3-5803-4106-b675-abaf3e8b7199%2F4e5fc431-ed60-474d-be5b-aee4461e03d4%2Fgpfv4wg_processed.png&w=3840&q=75)
Transcribed Image Text:5 The Financial Sector - End of Chapter Problem
a. How does maturity transformation impact long-term investment spending?
Maturity transformation
decreases long-term investment by limiting the use of short-term deposits to short-term loans only.
increases long-term investment by making it possible to extend long-term loans even when no savers are willing to
make a long-term loan.
increases long-term investment by convincing savers to promise they will not withdraw their money for the length of
the loan.
increases long-term investment by having investors take out a series of short-term loans successively, repaying each
previous loan, until the long-term project is completed.
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