What is asset transformation? Provide some examples in regards to it.

Expert Solution

A type of transformation whereby banks use deposits from customer in any form to generate revenue by pooling deposits to make loan. Asset transformation is the process of transforming bank liabilities (deposits) into bank assets (loans). By nature, deposits are subject to withdrawal by customers (depositors) at any point in time or as stipulated in the deposit contract/agreement. Loans are bank assets because they represent money that the bank lends and expect to receive back in the form of principal and interest payments. As such, banks undertake asset transformation by lending long and borrowing short, with the interest rate differential being its transformation revenues. Typically, banks and other financial institutions perform asset transformation by offering their customers a variety of financial products on both sides of the balance sheet such as deposits, investment and loan products, etc.

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