A shadow bank engages in maturity transformation by:
A)accepting short-term deposits and making short-term loans.
B)accepting long-term deposits and making long-term loans.
C)borrowing short term and lending or investing long term.
D)borrowing long term and lending or investing short term.

Question

Quizplus · Accepted Answer

Shadow banks engage in maturity transformation by borrowing short term (typically by issuing commercial paper or repurchase agreements) and investing or lending long term (using the funds to purchase long-term bonds or make longer-term loans). This allows them to earn a higher yield on their assets than they pay on their liabilities, but also exposes them to the risk of funding mismatches if short-term funding dries up or interest rates rise.

A Shadow Bank Engages in Maturity Transformation By