Question

Match the given statements to the appropriate definition relating to the banking industry. There will be two statements for each category.

1. Asset-liability time mismatch
2. Diversification Answer
a. Bank Beans Bank makes a variety of loans such as car, home, and business loans
b. Beans Bank's liabilities need to be paid on demand, und it only holds long term assets.
c. Beans Bank's deposits can be short term. While its assets are in 30-year mortgages
d. Beans Bank crves customers in a wide geographic arca

Answer 1

Bank deposits are treated as assets for individuals and liabilities for banks; loans are liabilities for individuals and assets for banks, highlighting an asset-liability time mismatch in banking.

Step-by-step explanation:

The question relates to the characterization of bank deposits and loans on a balance sheet, both from an individual's perspective and a bank's perspective. For an individual, bank deposits would be considered assets because they represent saved money that can be withdrawn and used.

However, for a bank, deposits are seen as liabilities because they owe this money to their depositors and must be able to provide it upon request. Conversely, loans given out are considered liabilities for an individual since they are obligated to repay the borrowed funds with interest. In contrast, loans are assets to a bank in that they represent future income from the interest that borrowers will pay over the loan period.

Thus, there is an asset-liability time mismatch, which is a crucial concept in banking, where banks manage liabilities that can be withdrawn in the short term against longer-term assets like mortgages that are repaid over many years. Bean Bank's situation, providing short-term deposits and long-term mortgages, emphasizes this mismatch.