Maturity transformation is the practice of borrowing short and lending long. Banks issue deposits that can be withdrawn at short notice and hold loans and securities that mature over years.

It is economically valuable: it gives households liquid savings while financing long-term investment. It also creates liquidity risk. If many depositors withdraw at once, the bank may have to sell illiquid assets at a loss.[1]

Maturity transformation is a structural feature of banking, not a mistake. The policy question is how to make it safe enough without eliminating the benefits.[2]

Sources

  1. Diamond, Douglas W.; Dybvig, Philip H.. Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy. 1983. View source Accessed Nov 11, 2026.
  2. Borio, Claudio. The financial cycle and macroeconomics: What have we learnt?. BIS Working Paper 395. 2012. View source Accessed Nov 11, 2026.