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Maturity Transformation
Maturity transformation is the practice by financial institutions of borrowing money on shorter timeframes than they lend money out. Financial markets also have the effect of maturity transformation whereby investors such as shareholders and bondholders can sell their shares and bonds in the secondary market (i.e. the larger part of the stock market) at any time without affecting the company that issued the shares or bonds. Thus the company can be a long-term borrower from a market of short-term lenders. The short-term lenders are simply buying and selling the ownership of the shares or bonds on the stock market. The company keeps a register of owners and changes the name whenever there is a sale. Brad DeLong See also * |
Asset–liability Mismatch
In finance, an asset–liability mismatch occurs when the financial terms of an institution's assets and liabilities do not correspond. Several types of mismatches are possible. For example, a bank that chose to borrow entirely in US dollars and lend in Russian rubles would have a significant currency mismatch: if the value of the ruble were to fall dramatically, the bank would lose money. In extreme cases, such movements in the value of the assets and liabilities could lead to bankruptcy, liquidity problems and wealth transfer. A bank could also have substantial long-term assets (such as fixed-rate mortgages) funded by short-term liabilities, such as deposits. If short-term interest rates rise, the short-term liabilities re-price at maturity, while the yield on the longer-term, fixed-rate assets remains unchanged. Income from the longer-term assets remains unchanged, while the cost of the newly re-priced liabilities funding these assets increases. This is sometimes called a matu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Fractional Reserve Banking
Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. The country's central bank determines the minimum amount that banks must hold in liquid assets, called the "reserve requirement" or "reserve ratio". Most commercial banks hold more than this minimum amount as excess reserves. Bank deposits are usually of a relatively short-term duration, and may be "at call", while loans made by banks tend to be longer-term, resulting in a risk that customers may at any time collectively wish to withdraw cash out of their accounts in excess of the bank reserves. The reserves only provide liquidity to cover withdrawals within the normal pattern. Banks a ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Banking Terms
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords. Banking in its modern sense evolved in the fourteenth century in the prosperous cities of Renaissance Italy but in many ways functioned as a continuation of ideas and concepts of credit and lending that had their roots in the anc ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
