Liquidity and Maturity Mismatch of Bank Assets and Liabilities

A small business owner needs to deposit a large payment from a client. She requires constant, immediate access to these funds to pay suppliers and employees throughout the month. Why would she choose a standard commercial bank account for these funds over a 5-year government bond that offers a significantly higher rate of return?

Relative Importance of Bank Guarantees

Bank Run Scenario

A commercial bank makes two fundamental promises to its depositors regarding their funds. Match each type of promise with its correct description.

A bank's guarantee of eventual repayment of all deposits is, by itself, sufficient to maintain depositor confidence and prevent a bank run, even if the bank cannot honor all withdrawal requests immediately.

The Dual Promises of a Commercial Bank

A small business owner maintains a checking account with a commercial bank. The account balance is currently $50,000. The bank has invested the majority of its depositors' funds in long-term assets, such as 30-year mortgages. If the business owner needs to withdraw $40,000 immediately to pay for a large inventory shipment, which of the bank's promises to its depositors is being tested at that moment?

Bank Solvency vs. Liquidity

A new financial institution, 'SecureHold Investments,' offers accounts that are fully backed by long-term government bonds, guaranteeing that every dollar deposited will be repaid in full with interest. However, funds can only be withdrawn at the end of a fixed 5-year term. Which fundamental promise, typically made by commercial banks for their most common accounts, is 'SecureHold Investments' failing to provide?

The Banker's Dilemma