Glossary

Maturity transformation

Maturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020