What is the difference between maturity transformation and liquidity transformation?

Maturity transformation is about time: short liabilities funding long assets. Liquidity transformation is about how easily an asset turns into cash: liquid liabilities funding assets that are hard to sell. In a bank the two usually travel together, but they can separate. A long government bond has a long maturity and can be sold today; a six-month loan to a private company is short and hard to sell. Holding the first carries maturity risk with little liquidity risk, and the second the reverse.

How does maturity transformation cause a bank run?

A bank's depositors have legal rights to more cash than it holds, and each of them can work that out. In ordinary times withdrawals are small and new money offsets them. Once depositors believe others will leave first, leaving becomes the rational move, and the bank must sell or borrow against loans it cannot quickly turn into cash. Deposit protection schemes in New Zealand, Australia and the UK weaken that incentive for smaller balances, up to a limit. Large unprotected balances remain the part most likely to move.

How do banks reduce maturity mismatch?

By lengthening liabilities, holding more liquid assets, or both. They issue term bonds and pay up for term deposits. They keep securities that can be sold or pledged to a central bank. They charge lending teams for long-dated funding, so a long loan carries its true cost. They set board-approved limits on the gap and on reliance on wholesale markets, and rehearse a funding plan for a stress. Each of these costs margin, so a bank manages the gap within limits rather than closing it.

Do non-bank lenders have maturity transformation risk?

Some do, and without deposits or routine access to a central bank. A finance company lending for five years out of warehouse lines that renew each year has the same exposure in a different form: its funders can leave before its borrowers repay. A credit fund whose investors are locked in for the life of the loans has largely avoided it. The reading is the same for any lender: compare when the funders can leave with when the borrowers will pay.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Maturity Transformation: a Worked Example

Lent for years, owed by Friday. The gap is the business.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A bank can lend a business money for five years because it does not expect everyone it owes to ask for their money at once. Maturity transformation names that bet: liabilities falling due in days or months fund assets that repay over years. Savers get access, borrowers get time, and the bank is paid for standing between them. The question to put to any bank is not whether the gap exists, since the gap is the business, but how wide it runs, how much funding would stay in a stress, and what stands ready if it does not.

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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PART OF What Is Corporate Banking?

// 01 — WHAT THE BANK IS PAID TO BRIDGE

A saver wants to reach her money on any day. A manufacturer buying a press wants to repay it over seven years. Neither would lend to the other on the other's terms. A bank can stand between them because a large pool of depositors behaves more steadily than any one of them: some withdraw, others pay in, and the total moves far less than the sum of their legal rights.

Two different things can then go wrong, and they are often run together. The funding can leave, which is a liquidity problem. Or it can reprice, which is an earnings problem. Liquidity is the one that closes a bank quickly: it can survive a poor year of earnings, but not a morning on which it cannot pay.

// 02 — HOW THE GAP IS MEASURED

Gap in a time bucket = assets falling due − liabilities falling due

Cumulative gap = the buckets added up to that point

Liquidity Coverage Ratio = high-quality liquid assets ÷ net outflows over 30 stressed days

Net Stable Funding Ratio = available stable funding ÷ required stable funding

The first two lines are a maturity ladder. Read on contract dates alone it makes every bank look dangerous, because an on-demand deposit is contractually gone tomorrow. So banks keep a second version that slots deposits by how long they have in fact stayed: behavioural maturity.

The two ratios come from the Basel Committee. The first asks whether a bank can survive a severe month; the second asks whether stable money funds the assets it cannot readily sell, over a year. The Basel minimum for each is 100%. Local versions differ. In Australia, APRA sorts deposit-takers into those held to the coverage ratio, with the stable funding ratio added for locally incorporated ones, and those that instead hold a minimum share of their liabilities in liquid assets. In the UK the ratios sit in the PRA's rulebook, with a retail-deposit test that releases some simpler firms from monitoring the stable funding ratio. New Zealand's Reserve Bank has used its own mismatch ratios and a core funding ratio for locally incorporated banks, and its published draft liquidity standard under the Deposit Takers Act keeps both measures.

// 03 — THE EXAMPLE

A regional lender, constructed for this page like every figure in it, has US$2.0bn of assets. Its contractual ladder, in US$m:

Bucket Assets Liabilities Gap Cumulative

Up to 1 month 360 1,050 −690 −690

1–12 months 240 420 −180 −870

1–5 years 650 290 +360 −510

Over 5 years 750 240 +510 0

The first bucket holds US$300m of liquid securities and US$60m of loans falling due against US$900m of on-demand deposits and US$150m of other funding maturing. The last bucket's liabilities include US$160m of equity. Read as drawn, the lender owes US$690m more within a month than it is owed. Its records say otherwise: suppose US$720m of the on-demand money behaves like funding of one to five years. The first bucket becomes +US$30m (360 − 330), and the twelve-month shortfall falls from US$870m to US$150m.

A stress asks how far that behaviour can be trusted. The percentages below are the example's assumptions, not regulatory run-off rates, and half the loans falling due are assumed to roll.

Moderate: 15% of 900 = 135 + 150 maturing − 30 inflow = 255 300 ÷ 255 = 118%

Severe: 30% of 900 = 270 + 150 maturing − 30 inflow = 390 300 ÷ 390 = 77%

The ladder did not change between those two lines. The assumption about depositors did. That is why liquidity is read as a range, and why the mix of deposits matters: many small protected balances tend to stay longer than a few large corporate ones. Narrowing the gap has a price. Replacing US$200m of on-demand money with five-year bonds costing 1.5 points more would give up US$3.0m a year.

// 04 — THE MISMATCH IT IS CONFUSED WITH

Maturity is when the money comes back. Repricing is when the rate changes. A five-year floating-rate loan funded by 90-day deposits has a wide maturity gap and almost no rate gap, because both sides reset every quarter. A five-year fixed-rate loan funded the same way has both, and an interest rate swap can remove the second without touching the first. The rate gap is the subject of net interest margin and the repricing gap; how far deposit rates follow the market is deposit beta.

DEFINED IN ONE PARAGRAPH → · WHERE BANKS GET THEIR MONEY → · BEHAVIOURAL MATURITY →

// 05 — WHERE IT DECIDES A FILE

A borrower meets the gap in three places. The first is tenor: a longer commitment needs more stable funding behind it, which is one reason a bank charges for term through funds transfer pricing and may be keener on three years than seven. The second is the undrawn line. A committed revolver is a promise to find cash on a day the bank does not choose, and liquidity rules count part of it as a possible outflow. An uncommitted facility leaves the bank a way out, which is why a borrower reading its own liquidity counts it differently.

The third is the deposit. A business with a large balance on call is a line in the bank's stress as well as a customer, and Basel's coverage ratio assumes faster run-off from large corporate balances than from small retail ones. A reader assessing a bank as a counterparty reads that side of the balance sheet as closely as the loans: see how to read bank results.

FUNDS TRANSFER PRICING → · HOW BANKS WORK →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Financial Stability Institute (BIS), Net Stable Funding Ratio: Executive Summary — Describes the NSFR as available over required stable funding with a 100% minimum, aimed at reliance on short-term funding for illiquid assets — section 02.
Financial Stability Institute (BIS), Liquidity Coverage Ratio: Executive Summary — Sets out the 30-day stress horizon and high-quality liquid assets at least equal to total net cash outflows — section 02.
Australian Prudential Regulation Authority, Prudential Standard APS 210 Liquidity — Distinguishes LCR deposit-takers, which also meet the NSFR if locally incorporated, from those holding minimum liquidity holdings instead — section 02.

// QUESTIONS PEOPLE ASK

What is the difference between maturity transformation and liquidity transformation?: Maturity transformation is about time: short liabilities funding long assets. Liquidity transformation is about how easily an asset turns into cash: liquid liabilities funding assets that are hard to sell. In a bank the two usually travel together, but they can separate. A long government bond has a long maturity and can be sold today; a six-month loan to a private company is short and hard to sell. Holding the first carries maturity risk with little liquidity risk, and the second the reverse.
How does maturity transformation cause a bank run?: A bank's depositors have legal rights to more cash than it holds, and each of them can work that out. In ordinary times withdrawals are small and new money offsets them. Once depositors believe others will leave first, leaving becomes the rational move, and the bank must sell or borrow against loans it cannot quickly turn into cash. Deposit protection schemes in New Zealand, Australia and the UK weaken that incentive for smaller balances, up to a limit. Large unprotected balances remain the part most likely to move.
How do banks reduce maturity mismatch?: By lengthening liabilities, holding more liquid assets, or both. They issue term bonds and pay up for term deposits. They keep securities that can be sold or pledged to a central bank. They charge lending teams for long-dated funding, so a long loan carries its true cost. They set board-approved limits on the gap and on reliance on wholesale markets, and rehearse a funding plan for a stress. Each of these costs margin, so a bank manages the gap within limits rather than closing it.
Do non-bank lenders have maturity transformation risk?: Some do, and without deposits or routine access to a central bank. A finance company lending for five years out of warehouse lines that renew each year has the same exposure in a different form: its funders can leave before its borrowers repay. A credit fund whose investors are locked in for the life of the loans has largely avoided it. The reading is the same for any lender: compare when the funders can leave with when the borrowers will pay.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Regulatory reporting analystProduces the returns the bank's regulator relies on — capital, liquidity, large exposures, credit quality.
Treasury analystFunds the bank and manages the interest rate and liquidity risk created by its own balance sheet.
Financial accountantProduces and stands behind the bank's own numbers — the ledger, the close, the statutory accounts.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

WHAT THEY HEAR · THE BANK · FUNDING AND LIQUIDITY

A bank treasurer tells the credit committee: 'Deposits grew nicely this quarter — mostly from a few large corporate customers.'

What should the committee hear?

3 MORE ON THE BANK · FUNDING AND LIQUIDITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHMaturity transformation What is maturity transformation, and why is it a bank's central risk?