Markets · 6 pages · 12 min

Why that mismatch is the business and the risk

The gap between short funding and long loans is both how a bank earns and how it can get stuck.

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From the opening

The mismatch is the business because depositors accept a lower rate in exchange for the right to leave, while borrowers pay more for the right to stay. The same gap is the risk because depositors can leave before the loans come due, or the cost of funding can move against rates already locked in. The opening covers margin comes from the gap, rising funding can squeeze loans, and leavers force a cash hunt.

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Inside

Margin comes from the gap
Rising funding can squeeze loans
Leavers force a cash hunt
Cushions shrink both sides
Where the idea stops applying
A distinction worth keeping

Sources

Interest-rate risk in the banking book
Liquidity risk of deposit funding

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Why that mismatch is the business and the risk

From the opening

Inside

Sources

Also on the desk