A maturity transformation that doesn’t provide a full or perfect match between short-term liabilities and long-term assets (which are financed by these liabilities). Deposits are short-term liabilities, but a typical bank (as part of the so-called fractional reserve) or similar-type non-bank institutions face a maturity mismatch in its attempt to transform liabilities into assets (taking short-term deposits and issuing long-term loans). This maturity transformation, makes it harder for a bank to convert credit into liquidity (i.e., cash), and if possible the process takes long time.
The state of maturity mismatch can give rise to two types of risk: liquidity risk and interest rate risk. These risk factors are particularly higher for a non-bank institution (which means its maturity mismatch is wider) as their operations are unregulated (as opposed to banks)- that is they receive no protection from central banks (safety net), and their credit assets are not standard assets.
In another context, maturity mismatch may also denote a situation where a firm’s short-term liabilities exceed its short-term assets, or where a hedge position has unmatched maturities (of its components)- such as the case in which the maturity of a hedge does not match the maturity of its underlying assets.
Maturity mismatch is also referred to as an imperfect maturity transformation.
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