Final answer:
The significant liquidity risk arises when there is an asset-liability time mismatch in banks, which can lead to a bank's failure if many depositors withdraw their funds simultaneously or if the bank has to pay higher interest to depositors than it earns from loans. The correct option is c. Liquidity
Step-by-step explanation:
The most significant risk faced by a bank from its corporate trust activities is liquidity risk. This risk is the ability for customers to withdraw the bank's liabilities in the short term, while it takes much longer for the bank to be repaid for its assets, like loans and bonds. If depositors were to suddenly withdraw their funds en masse, the bank might fail due to this asset-liability time mismatch. Additionally, if interest rates rise, the bank may have to pay higher interest rates on deposits while still receiving lower rates from existing loans, leading to a situation where the bank pays out more in interest than it receives. This could not be sustained over the long term and thus represents a substantial threat to the bank's stability.
Banks act as financial intermediaries, offering various accounts and purchasing insurance through the FDIC to mitigate the risk of bank failure. Deposit insurance, however, does not protect against liquidity risk, which is why it is considered one of the most significant threats to banks.
The correct option is c. Liquidity