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      Question

      A structural maturity mismatch caused by funding

      long-term, illiquid infrastructure assets through short-term deposit liabilities directly escalates which category of financial risk? 
      A Credit risk Correct Answer Incorrect Answer
      B Liquidity risk Correct Answer Incorrect Answer
      C Operational risk Correct Answer Incorrect Answer
      D Market risk Correct Answer Incorrect Answer
      E Legal risk Correct Answer Incorrect Answer

      Solution

      The fundamental hazard of maturity transformation (borrowing short and lending long) is liquidity risk. It represents the risk that a financial institution will be unable to fulfill its short-term payment obligations—such as customer withdrawals—because its funds are tied up in non-marketable, long-term credit facilities.

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