An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.

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Question restatement: The statement says that an FI is short-funded when the maturity of its liabilities is less than the maturity of its assets. Answer options: TRUE, FALSE.

Option 1: TRUE. The core idea here is a maturity mismatch issue. If the liabilities have shorter maturities than the assets, the firm must meet short-term obligations with funds that are tied up in longer-term assets. This creates liquidity and refinancing risk because assets maturing later cannot readily be converted to cash to cover near-term liabilities without selling long-term investments at potentially unfavorable prices or incurring penalties. In many risk-management frameworks, having liabilities maturing earlier than assets is described as being under-funded or short-funded on the liability side, since the asset base is not aligned to immediately meet short-term obligations.

Option 2: FALSE. This would imply that short funding occurs when liabilities mature later than assets, which would invert the typical liquidity risk profile. If the liabilities mature later than the assets, the organization has more immediate liquidity available from current assets relative to long-term obligations, reducing the immediate funding gap. However, the given statement explicitly matches the scenario where liabilities mature sooner, not later, and thus is not false under common interpretations of funding risk.

In summary, the assertion aligns with the idea of a funding mismatch where short-term liabilities precede longer-term asset maturities, which characterizes short funding in many FI risk contexts. The False option would be incorrect because it contradicts the described mismatch scenario.

BU.232.715.81.SP25 HW2

An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.

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