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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Maturity transformation

What is maturity transformation, and why is it a bank's central risk?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Maturity transformation is what a bank does by taking deposits that can be withdrawn at short notice and lending them for years. The spread between the two is most of a bank's income, and the mismatch is most of its liquidity risk: the loans cannot be called in to meet withdrawals, so a bank holds liquid assets and a spread of funding sources against the day depositors want their money back faster than it comes in. The same mismatch is why a bank's funding — how stable its deposits are, how much is borrowed in wholesale markets — is read as closely as its loans.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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