Business Case Studies & Business Publications

The Economics of Maturity Transformation

Hachem, Kinda

Technical Note

The Economics of Maturity Transformation

Hachem, Kinda

GEM-0191 | Published August 17, 2021 | 12 pages Technical Note

Collection: Darden School of Business

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Few concepts are as important as maturity transformation for understanding financial crises. This technical note guides students through the key mechanisms in the theory using a representative investor, a long-term borrower, and an issuer of shorter-term claims. It then highlights the pervasiveness of maturity transformation in modern financial products. It works well before classes on deposit insurance, bank regulation, the 2008 financial crisis, and/or shadow banking generally.

This technical note is designed for an MBA elective on money and banking. It was prepared to serve the following teaching objectives: - Explore how a short-term asset is created from a longer-term one. - Discuss why such maturity transformation may be valuable to investors. - Understand the fundamental fragility that opens the door to crises. - Appreciate the pervasiveness of maturity transformation in the data.