Question

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.

Answer 1

Euro bank will be facing the mismatch of maturity risk between euros deposit and Euro loans when there would be a mismatch of duration of short term liabilities with the short term assets as well as long term liabilities with long term asset and medium term liabilities with medium term Assets.

Generally this type of risk will be occouring 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 it will be making the bank face the liquidity crunch and it will expose the euro bank into a mismatch problem.

This type of mismatch of euro deposit and Euro loans can be managed by the euro banks through proper asset and liability management and it will be helpful in matching the appropriate requirement of the company with the appropriate durations of the loans and deposits so it will be helping the company in management of this type of missmatching risk and if there is a certain missmatching risk, then it can be controlled by the company through hedging exposes and mitigating this exposuress through sale of equities in order to match the needs of short-term requirements to avoid a Bank run.

Examples of risk arising out of mismatching the Euro loans with Euro deposits can be managed through taking exposure into a hedge fund or matching the Asset and liability properly like 2 year loan payment will be matched with 2 year deposits so,it will be helpful in asset liability management in order to avoid such mismatching problem.