Asset–liability mismatch

In finance, if there is a contradiction in the financial conditions of the organization's assets and liabilities, a mismatch of asset liabilities occurs. Several kinds of mismatch can be considered

For example, a bank that chooses to borrow in the Russian ruble if you borrow the full amount in US dollars will face a serious currency discrepancy. When the value of the ruble falls sharply, the bank loses money. In extreme cases, such changes in the value of assets and liabilities could lead to bankruptcy, liquidity problems and asset transfers.

Banks also have large amounts of long-term assets (fixed rate mortgages, etc.) funded by short-term borrowings (deposits etc.). Short-term interest rates rise, short-term debt is reset at maturity, but long-term fixed rate assets remain unchanged. Long-term asset returns remain constant and the cost of new price change liabilities to raise these assets will increase. This is also called term mismatch and can be measured by the difference in time.

If the bank owes it at a certain interest but lends another interest rate, interest inconsistency will occur. For example, banks can borrow money by borrowing a fixed rate mortgage by issuing fixed rate bonds. Even if the interest rate rises, the bank needs to increase the interest payment to the creditors, even if the interest on the mortgage is not increasing.

Mismatch between assets and liabilities It is important that insurance companies and various pension schemes are likely to have long-term liabilities (promising payment to insurance members or pension scheme members) that must be supported by assets . Therefore, choosing an asset that matches financial obligations is an important part of the long-term strategy.

There are few companies or financial institutions that completely match assets and liabilities. In particular, discrepancies between bank deposits and the maturity of the loan make the bank vulnerable to banking. On the other hand, "controlled" mismatches such as short-term deposits and somewhat long-term high-interest financing to customers are at the center of many financial institutions' business models.

Bodie, Zvi (2006). "Assets Liability Matching and Federal Deposits and Donation Insurance" (PDF) Review of the Federal Reserve Bank of St. Louis. 88 (4): 323-29

Another factor that is thought to lead to the financial crisis is asset-liability mismatch. This has not been adjusted properly to financial institution debt and risk associated with assets. For example, commercial banks offer deposit accounts that can be withdrawn at any time, and they use that income to provide long-term loans to companies and homeowners. A mismatch between a bank's short-term debt (deposit) and a long-term asset (loan) is considered as one of the reasons for the operation of the bank. (It is important that the depositor panicks and draws out the proceeds of the loan at a faster rate than the bank If you decide). Similarly, from 2007 to 2008, Bear Stearns failed because it was not possible to renew short-term borrowings for long-term investment in mortgage-backed securities.

There are few companies or financial institutions that completely match assets and liabilities. In particular, discrepancies between bank deposits and the maturity of the loan make the bank vulnerable to banking. On the other hand, "controlled" mismatches such as short-term deposits and somewhat long-term high-interest financing to customers are at the center of many financial institutions' business models.

In a world where interest rates fluctuate drastically, discrepancies between the asset and the price change date of the liability may cause significant benefits to the bank. The principle for dealing with this risk is called "asset / liability management". It appeared in the United States in the 1970s and 1980s. A savings financial institution holding a long-term fixed-rate mortgage is seriously pressured if short-term interest rates rise sharply because the Fed is struggling with inflation and you have to pay to raise interest rates. Savings deposits to avoid liquidity bankruptcy