The process whereby a bank capitalizes on some sort of mismatch between its assets and liabilities. In other words, this involves a bank’s attempt to generate returns through mismatches between the two sides of its balance sheet. For example, credit institutions (banks, thrifts, etc) typically transform short-term, liquid liabilities into long-term, illiquid assets. This specific process is known as liquidity transformation. Other types of transformation include: credit transformation, maturity transformation, size transformation, information transformation, risk transformation, term transformation, and so on. Transformation, in all its different types, is one of the key banking functions and involves relevant types of risks such as liquidity risk, credit risk, etc.
July 13, 2024
