A type of financial transformation in which the liabilities of intermediaries, such as banks and non-banks, are typically much more short-term than their assets. However intermediaries pool deposits (short-term sources of funds) in order to meet the demand of borrower-spenders for long-term funds. In other words, maturity transformation involves the financing of long-term assets with short-term liabilities.
Short-term liabilities include asset-backed commercial paper (ABCP) which typically have short maturities (less than a year), while long-term assets include long-term loans extended to borrowers.
This type of transformation allows intermediaries to create money (money creation) and credit. By maturity transformation, banks create two-sided claims, whereby undertaking a process that help mitigate information asymmetry and minimize transaction costs on both legs.
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