If a bank is unable to refund the short term deposits as funds are locked in long term loans, it involves which of the following?

Interest rate risk

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Operational risk

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Liquidity risk

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Market risk

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Solution

The correct option is D Liquidity risk
Liquidity risk of a bank refers to the situation when a bank faces cash shortage. In such a situation bank is not able to pay its short term deposits as the funds of these deposits are blocked in long term loans given to the account holders.

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From which source, a firm can raise long term funds when a loan is not provided by a commercial bank? Discuss its merits.

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