Maturity Intermediation

In commercial bank example, you should note two things. Banks have deposits that are payable on demand or have a specific maturity date and are mostly less than three years. Secondly, the maturity of a loan made by a commercial bank may be more than three years. Commercial banks convert long-term assets into short-term by issuing their own financial claims by entering into the financial system, commercial banks lend to borrowers for the requested period, and provide financial assets to depositors for an expected investment horizon.

In commercial bank example, you should note two things. First, the maturity of deposits is usually short term. Banks have deposits that are payable on demand or have a specific maturity date and are mostly less than three years. Secondly, the maturity of a loan made by a commercial bank may be more than three years. If commercial banks did not exist in the financial system, borrowers would either have to borrow for a shorter period to match the length of time they are willing to lend, or find a borrower who is willing to invest for the requested loan period.

Commercial banks convert long-term assets into short-term by issuing their own financial claims by entering into the financial system, commercial banks lend to borrowers for the requested period, and provide financial assets to depositors for an expected investment horizon. Maturity mediates by referring to the function of these financial intermediaries.

The implications of maturity mediation for financial systems are twofold. The first is that debt investors have more options regarding the maturity of the financial instruments they invest in, and borrowers have more options for the length of their debt obligations. Second, investors are reluctant to fund long-term borrowers, forcing long-term borrowers to pay higher interest rates than short-term loans. That is, a financial intermediary has to be willing to make long-term loans and accept risk at a lower cost to the borrower than an individual investor, because the financial intermediary can rely on successive funding sources for a long period of time. (For example - A depository institution may reasonably expect to hold successive deposits to be able to fund long-term investments). As a result of this intermediation, the cost of long-term borrowing in the economy is likely to decrease.

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