Asset-liability mismatch
Also called: ALM mismatch, Maturity mismatch · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
An asset-liability mismatch is a gap between how long a lender's assets and liabilities last. Assets here are the loans the lender has given, and liabilities are the money it has borrowed. The usual case is funding long-term loans with short-term borrowing. When the short-term money must be repaid or rolled over, the lender may not have the cash, even if its loans are good. This is liquidity risk, and in banks it can turn stress into a bank run.
Example
Imagine funding 15-year loans with 3-month borrowing. IL&FS (September 2018) funded infrastructure loans with short-term money and defaulted. DHFL (2019) funded long-term housing loans with commercial papers (CPs), which are short-term market borrowings. Funding to NBFCs then froze. Tools such as the Liquidity Coverage Ratio (100% since January 2019) and the Net Stable Funding Ratio (from October 2021) aim to limit this risk for banks.
Don't confuse with
- Insolvency: here assets are worth less than liabilities. A mismatch can hit a lender that is solvent but short of cash.
Related concepts
- Differentiated banking
- Payments bank
- Small finance bank
- Neobank
- Non-Banking Financial Company
- Scale-based regulation
- Shadow banking
- Digital lending