Mismatch Risk
Mismatch risk occurs when the assets and liabilities of a company or financial institution have differing characteristics, such as maturity dates, interest rates, or currencies, creating a potential exposure to market fluctuations. For example, if a bank’s liabilities are short-term (deposits) and its assets are long-term (loans), it may face liquidity risk if depositors withdraw funds faster than the loans are repaid. Mismatch risk can also arise in currency or interest rate mismatches.
Example
A bank lends money through long-term loans but funds these loans with short-term deposits, creating a maturity mismatch and exposure to liquidity risk.
Key points
• Occurs when assets and liabilities have differing characteristics, such as maturity, interest rates, or currencies.
• Creates potential exposure to market fluctuations, including liquidity, interest rate, or currency risks.
• Common in banking, where liabilities like deposits may be short-term, while assets like loans are long-term.
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