ACCA Financial Management (F9) Certification Practice Exam

Which type of market is known for short-term borrowing among banks?

1. Money market

2. Capital market

3. Inter-bank market

4. Finance house market

The correct answer is: Inter-bank market

The inter-bank market is recognized for facilitating short-term borrowing among banks. In this market, financial institutions lend to and borrow from one another in order to manage their liquidity needs, often for periods as brief as overnight. This is critical for maintaining balance sheet stability and ensuring that banks can meet their short-term obligations. The inter-bank market operates on the principles of trust and counterparty risk, as banks must believe in each other's creditworthiness. Transactions in this market typically involve instruments like inter-bank loans, certificates of deposit, and repurchase agreements, which are all geared towards managing short-term financing needs. While the money market also plays a role in short-term funding, it is broader and includes a wider array of short-term financial instruments and institutions, not limited to just banks. The capital market, in contrast, is focused on long-term investments and securities. The finance house market pertains to non-bank financial institutions and deals with various forms of non-bank lending, making it distinct from the inter-bank market. Each of these other markets has different functions and focuses, but the inter-bank market stands out for its specific role in short-term bank-to-bank transactions.