What is maturity transformation?
Maturity transformation is the practice by financial institutions of borrowing money on shorter timeframes than they lend money out.
Why is maturity transformation important?
higher maturity transformation increases banks’ net interest margin, particularly in the context of a steeper yield curve, with higher short-term interest rates also having a positive effect.
What is maturity and liquidity transformation?
liquidity transformation: a concept similar to maturity transformation that entails using cash-like liabilities to buy harder-to-sell assets such as loans; credit risk transfer: taking the risk of a borrower’s default and transferring it from the originator of the loan to another party.
What is the risk of maturity transformation?
However, ‘excessive’ maturity transformation— even without leading to systemic vulnerabilities— increases banks’ interest rate risk exposure and lowers their net interest margin.
Why do banks use maturity transformation?
In textbook models, banks engage in maturity transformation to earn the average difference between long-term and short-term rates, that is, to earn the term premium.
Do we need banks for maturity transformation?
In fact, banks not only can but must engage in maturity transformation in order to avoid interest rate risk. Since their expenses are insensitive, holding only short-term assets would expose banks to the risk of a decline in interest rates.
How do banks carry out maturity transformation?
Maturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages. They take short-term sources of finance, such as deposits from savers and money market loans, and turn them into long-term borrowings, such as mortgages.
How do banks profit from maturity transformation?
Maturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages. In return for providing this service they make money by charging more for a loan than they offer to pay on, say, a deposit.
Why do banks carry out maturity transformation?
Why do banks do maturity transformation?
What does maturity transformation mean for a bank?
Maturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages. Despite all the furore that’s surrounded the sector recently, retail banks perform a vital role in an economy.
How is maturity transformation a feature of intermediation?
An inherent feature of financial intermediation is maturity transformation: banks invest in long- term assets, funded by short-term liabilities. Due to this institutional characteristic, the typical textbook view is that banks are strongly exposed to interest rate risk.
How does maturity transformation relate to the yield curve?
Maturity transformation and how it relates to the yield curve is a core concept in understanding finance. A yield curve plots the yield to maturity of a security and interpreting it is crucial in foreseeing where the economy might be headed. What is Maturity Transformation?
How are short-term lenders involved in maturity transformation?
The short-term lenders are simply buying and selling the ownership of the shares or bonds on the stock market. The company keeps a register of owners and changes the name whenever there is a sale. ^ “Maturity Transformation: 2012 Financial Markets Conference”. www.frbatlanta.org. Federal Reserve Bank of Atlanta. Retrieved 8 July 2014.
