Asset liability mismatch
From Wikipedia, the free encyclopedia
In finance, and particularly banking, an asset-liability mismatch occurs when the financial terms of the assets and liabilities do not correspond. For example, a bank that chose to borrow entirely in U.S. dollars and lend in Russian rubles would have a significant mismatch: if the value of the ruble were to fall dramatically, the bank would lose money. In extreme cases, such movements in the value of the assets and liabilities could lead to bankruptcy or liquidity problems.
Asset-liability mismatches can occur in several different areas. A bank could have substantial long-term assets (such as fixed rate mortgages) but short-term liabilities, such as deposits. Alternatively, a bank could have all of its liabilities as floating interest rate bonds, but assets in fixed rate instruments.
Asset-liability mismatches are also important to insurance companies and various pension plans, which may have long-term liabilities (promises to pay the insured or pension plan participants) that must be backed by assets.
Few companies or financial institutions have perfect matches between their assets and liabilities. Financial institutions in particular specialise in 'controlled' mismatches, such as between short-term deposits and somewhat longer term loans to customers.
Asset-liability mismatches can be controlled, mitigated or hedged by entering into derivative contracts like swaps.
