Which of the following statements depicts a difference between funding liquidity risks and trading liquidity risks?

Which of the following statements depicts a difference between funding liquidity risks and trading liquidity risks?
A . Funding liquidity risks are associated with how fast prices move in the market while trading liquidity risks originate out of bank trades.
B . Funding liquidity risks are concerned with the ability of the bank to fund deposits withdrawals while trading liquidity risks are concerned with the change in bid-offer spreads of asset values.
C . Funding liquidity risks are short term risks while trading liquidity risks are longer term risks.
D . Funding liquidity risks are associated only with the bank assets while trading liquidity risks are
associated with both assets and liabilities of the bank.

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Answer: B

Explanation:

Funding liquidity risk and trading liquidity risk are two distinct types of liquidity risks faced by financial institutions, particularly banks.

Funding Liquidity Risk: This type of risk pertains to a bank’s ability to meet its financial obligations as they come due without incurring unacceptable losses. It primarily concerns the bank’s ability to fund withdrawals, meet depositor demands, and other liabilities when they come due. If a bank cannot manage its funding liquidity, it may be forced to sell assets at fire sale prices, which can further deteriorate its financial condition.

Trading Liquidity Risk: This risk, on the other hand, deals with the market liquidity of the bank’s assets. It involves the risk of being unable to buy or sell assets at or near their market value due to inadequate market depth or market disruptions. It is more concerned with the bid-offer spreads and the ability to execute trades without significantly impacting the market price of the asset.

References: Based on the information provided in "How Finance Works" document, funding liquidity risks are concerned with the ability of the bank to fund deposit withdrawals while trading liquidity risks are concerned with the change in bid-offer spreads of asset values??.