In: Finance
Among other risks, Euro banks face a mismatch of maturity risk between euro deposit and euro loans. Explain how a typical Euro bank manages such type of risk. Provide examples.
Eurobank will be facing the mismatch of maturity risk between Euro deposit and Euro loans when there would be a mismatch of duration of short term liabilities with this short term assets along with mismatch between medium term liabilities and medium term Assets and long term liabilities and long term assets.
Generally this type of risk will be occurring when the bank will be financing the long-term requirement with the short-term fundings and this short term deposits will be needing the repayment back in short amount of time,where the longer term deposit will be generating money in a longer period of time,so banks will be faced with mismatch risk because they are not able to match the exposure with the receivables and hence they will be facing a liquidity crunch.
This type of mismatch of Euro deposit and Euro loan can be managed by the euro banks through proper Assets and liability management which will be helping the bank in order to appropriately manage the the risk of various securities according to their durations and they will be cutting onto differences in durations between the Assets and liabilities so they have ample liquidity so it will be helping the company in management of this type of missmatching risk and if there is a certain mismatching risk, then it can be controlled by the company through hedging those exposures and mitigating this exposuress through saleoyf equities in order to match the needs of short-term requirements to avoid a bank run.
Eamples of risk arising out of missmatching the Euro loans with Euro deposits can be managed through taking exposure into hedging contracts and it can be e using multiple asset liability management contracts like matching the duration of the loans with duration of the deposits so that there has to be no problem in repayment, like matching the 10-year loans with 10 year deposits so there would be complete matching of the Asset with the liability.