Which of the following best explains why commercial banks assume significant liabilities?

A. All commercial bank deposits are liabilities.
B. The loans commercial banks write can be risky.
C. Banks may pay too much interest on their deposits.
D. Banks may not charge enough interest on their loans to fund
operations and loan default risk.

I don't know about this one. I would think the best answer is B

You have to think: what is the biggest assets the bank has, and what is the biggest liability. Have you read your text?

yes I did and understand that demand deposits and savings, CD's are listed as a liability, but the reason why I'm getting stuck on A because it says "all deposits" and under assets, I see "deposits with federal reserve." listed.

The reason why I was looking at C, because if you deposit money into a bank, the bank would place 10% for example into the required reserve and would loan out 90%. The bank does assume the risk of the borrower defaulting on that loan.

The reason banks are failing these days is D, but that is not what the questiona aks. Having large liabilites is part of banking. They assume these liabilities in order to make money, loaning out the deposited money at interest and collecting fees.

Thanks for the info, it's making more sense now :)

To determine the best answer to this question, let's systematically analyze each option:

A. All commercial bank deposits are liabilities: This statement is true. When individuals or businesses deposit money into a commercial bank, the bank becomes liable to repay the depositors upon their request. However, this option alone does not fully explain why commercial banks assume significant liabilities.

B. The loans commercial banks write can be risky: While this statement is true, it does not explain why commercial banks assume significant liabilities. Risky loans are mainly a factor that affects the bank's assets, as the loans represent potential sources of income for the bank.

C. Banks may pay too much interest on their deposits: Paying excessive interest on deposits could lead to reduced profitability for the bank, but it does not specifically address why banks assume significant liabilities.

D. Banks may not charge enough interest on their loans to fund operations and loan default risk: This statement provides a plausible explanation. If banks do not charge enough interest on loans to cover their operational costs and the risk of loan default, they may face financial difficulties. This could result in assuming significant liabilities to maintain their operations and preserve liquidity.

Considering all the options, option D appears to best explain why commercial banks assume significant liabilities. By not charging enough interest on loans to adequately cover their costs and loan default risks, banks may need to take on additional liabilities to sustain their business activities. Therefore, option D is the most appropriate answer in this case.