Markets · 6 pages · 12 min
How a bank borrows short and lends long
A bank takes deposits that can leave soon and funds loans that repay over a longer time.
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From the opening
A commercial bank's deposits are mostly short promises, because customers can ask for cash on demand or after brief notice. The loans and bonds on the other side often repay over months or years, so the bank has borrowed short and lent long. The opening covers deposits fund longer loans, assets equal liabilities plus equity, and the margin pays for waiting.
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Inside
- Deposits fund longer loans
- Assets equal liabilities plus equity
- The margin pays for waiting
- Withdrawals still must be met
- Where the idea stops applying
- A distinction worth keeping
Sources
- Maturity transformation by banks
- Net interest margin