Matched Maturities

Coordination of the maturities of a financial institution's assets (such as loans) and liabilities (such as certificates of deposit and money-market accounts). For instance, a savings and loan might issue 10-year mortgages at 10%, funded with money received for 10-year CDs at 7% yields. The bank is thus positioned to make a three-percentage-point profit for 10 years. If a bank granted 20-year mortgages at a fixed 10%, on the other hand, using short-term funds from money-market accounts paying 7%, the bank would be vulnerable to a rapid rise in interest rates. If yields on the money-market accounts surged to 14%, the bank could lose a large amount of money, since it was earning only 10% from its assets. Such a situation, called a maturity mismatch, can cause tremendous problems for financial institutions if it persists, as it did in the early 1980s.

In bank Asset-Liability Management, the funding of loans with deposits of approximately equal durations to minimize interest rate risk. This is the contractual gap approach to funds management, carried out by matching maturities on opposite sides of the balance sheet in a given reporting period. For example, all 90-day loans are matched against liabilities expected to mature or reprice in 90 days. The difference between maturing assets and maturing liabilities is the contractual gap, which will be different for each calendar period. Matched funding gets more difficult as maturities lengthen. A bank could, for example, try to fund its five-year car loans with five-year Certificates of Deposit, but this is often difficult to achieve. A bank cannot prevent its depositors from withdrawing their money before the CD maturity date. Also, a bank may find it advantageous to deliberately Mismatch maturities when it believes interest rates are about to change. Maturity matching is more common in the Eurocurrency market where Eurodollar deposits, for instance, have fixed maturities, and can be matched easily against fixed term liabilities. Also called matched funding.