What Does "maturity Intermediation" Mean?

Maturity intermediation is an investment term that describes a bank's long-term lending on funds borrowed for a short-term investment. When a financial institution borrows money from certificates of deposit or demand deposits and then loans that money out as a 30-year mortgage, it engages in maturity intermediation. This practice puts banks in a vulnerable position due to short-term funding costs that may rise quickly.

The point of maturity intermediation is to make profits off the differences in interest rates. Banks transform short-term debt into long-term credit using maturity intermediation. Banks borrow money from depositors and pay those customers interest. Banks, in turn, take that money and lend it to people who need funds to pay for vehicles, houses and other large items. The short-term interest paid out to depositors is less than the long-term interest gained over a 30-year mortgage, so the financial institution profits.

There are two major vulnerabilities to this system that can reduce revenue. First is that short-term interest rates may rise faster than long-term interest rates, according to Investopedia. This reduces profit margins by making short-term debt more expensive. Assets may reduce in value over a long-term debt, which means fewer people are able to borrow money and the bank's lending capacity is reduced. For example, when homes lose value versus the costs of servicing mortgage debt, banks lose profits if customers are unable to pay loans.