What is Maturity Transformation in Banking?

The concept of maturity transformation is at the core of banking itself, as it aligns directly with one of the main roles of banks—financial intermediation.

Let me break it down in simple terms: A bank takes funds from Customer A at a lower rate and lends to Customer B at a higher rate, earning a spread—the difference between the two rates. Banks typically gather these funds on a short-term basis and lend them for longer periods. This creation of long-dated assets funded by short-dated liabilities is known as maturity transformation.

While essential for economic growth, maturity transformation exposes banks to interest rate risks and liquidity risks.