Maturity Transformation and Duration Risk

Borrowing Short to Lend Long

Commercial banking rests on an inherent structural mismatch: borrowing short-term customer deposits to purchase long-duration debt assets and mortgages.

When short-term interest rates spike faster than long-term yields, borrowing costs overwhelm asset cash flows. The unrealized balance sheet losses remain invisible until liquidity runs force asset sales at distressed market prices.

Duration risk is not an accounting nuance; it is the primary engine of modern credit contractions.