Maturity transformation

Despite all the furore that’s surrounded the sector recently, retail banks perform a vital role in an economy. They take short-term sources of finance, such as deposits from savers and  money market loans, and turn them into long-term borrowings, such as mortgages.

This is called maturity transformation – a rather grand way of saying that they exist to meet the needs of lenders and borrowers. In return for providing this service they make money by charging more for a loan than they offer to pay on, say, a deposit.

However, this process can backfire. For example, if there is a panic and a bank run, savers may all try to withdraw money at once. Equally, the money markets may suddenly dry up as lenders stop providing short-term loans to each other. Northern Rock demonstrated what can go wrong here just before it was bailed out by the government.

MoneyWeek magazine

Latest issue:

Magazine cover
Faster and faster...

The frenzied pace of the high-tech revolution

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.