Maturity transformation
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Borrowers and depositors generally have differing preferences about the maturity of their obligations and investments.
Borrowers normally prefer to borrow longer-term, for example to fund long-term investment in productive assets.
Investors generally prefer shorter-term, more liquid assets.
Maturity transformation is the essential economic function of banks and other intermediaries, which enables both borrowers and investors to meet their differing needs for maturities.
For this to work, there needs to be a very high degree of market confidence in the bank, especially on the part of its depositors.
