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Concept
Asset–liability mismatch
Summary
In finance, an asset–liability mismatch occurs when the financial terms of an institution's assets and liabilities do not correspond. Several types of mismatches are possible. An asset-liability mismatch presents a material risk at institutions with significant debt exposure, such as banks or sovereign governments. A significant mismatch may lead to insolvency or illiquidity, which can cause financial failure. Such risks were among the principal causes of economic crises such as the 1980s Latin American Debt Crisis, the 2007 Subprime Mortgage Crisis, the U.S. Savings and Loan Crisis, and the collapse of Silicon Valley Bank in 2023.
For example, a bank that borrows funds in U.S. dollars and lends in Russian rubles would have a significant currency mismatch: if the value of the ruble were to fall relative to the dollar, then the bank would incur a financial loss. In extreme cases, such changes in the value of the assets and liabilities could lead to bankruptcy, liquidity crises, or balance-of-payment crises.
According to Anne O. Krueger of the IMF, the combination of fixed exchange rates and unsustainable debt burdens can amplify the impact of currency mismatch risk. Krueger proposes sound economic policies of reducing public debt and managing capital flows as ways of mitigating these crises.
According to research from Bank of International Settlements, the risk presented by aggregate currency matches (at the national level) may be mitigated by stronger foreign exchange positions by the government sector. Higher forex reserves and less foreign currency-denominated debt are two measures of capital strength which may be useful in this regard.
A bank could also have substantial long-term assets (such as fixed-rate mortgages) funded by short-term liabilities, such as deposits. If the liabilities become due before the assets, then the bank may be unable to satisfy its obligations. As a result, it may be forced to liquidate some of its assets (perhaps at a loss) or raise additional capital (which may be dilutive or otherwise costly).
Official source
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