In finance, the term “matched book” describes a specific strategy employed primarily by banks and other financial institutions involved in maturity transformation, such as offering loans of different maturities. It’s a risk management technique designed to neutralize interest rate risk and liquidity risk associated with these operations.
At its core, a matched book seeks to align the maturities of assets (loans, investments) with the maturities of liabilities (deposits, borrowings). Ideally, for every asset with a specific maturity date, there is a corresponding liability with an identical maturity date. This balance minimizes the institution’s exposure to fluctuations in interest rates. If interest rates rise, the increase in the cost of funding liabilities is offset by the increase in returns on the assets. Conversely, if interest rates fall, the decrease in returns on assets is balanced by the decrease in the cost of funding liabilities.
Consider a bank offering a five-year fixed-rate mortgage funded by one-year certificates of deposit (CDs). This exposes the bank to significant interest rate risk. If interest rates rise after the first year, the bank will have to offer higher rates on the renewing CDs, potentially squeezing its profit margin on the mortgage. A matched book approach would involve the bank funding the five-year mortgage with a five-year liability, perhaps a five-year bond issuance or a long-term deposit.
However, achieving a perfectly matched book is rarely feasible in practice. This is due to several factors:
- Difficulty in finding exact matching maturities: It’s challenging to find liabilities and assets with precisely the same maturity dates and amounts.
- Transaction costs: Constantly adjusting the book to maintain a perfect match can incur significant transaction costs.
- Changing customer behavior: Deposit maturities might not coincide with anticipated schedules due to early withdrawals. Loan prepayments can also disrupt the matched maturity profiles.
Because of these challenges, most financial institutions aim for a “near-matched” book rather than a perfect match. This involves grouping assets and liabilities into maturity buckets and managing the mismatches within those buckets. Sophisticated techniques, such as gap analysis and duration matching, are used to assess and manage the remaining interest rate risk. Gap analysis compares rate-sensitive assets (RSAs) and rate-sensitive liabilities (RSLs) within each maturity bucket. Duration matching involves adjusting the portfolio to maintain a target duration, which is a measure of the price sensitivity of a financial instrument to changes in interest rates. By matching the durations of assets and liabilities, the bank can immunize its net worth against interest rate movements.
While a matched book significantly reduces interest rate risk, it doesn’t eliminate it completely. Basis risk (the risk that interest rates on different instruments will not move in perfect correlation) and embedded options (such as prepayment options on mortgages) can still expose the institution to unforeseen losses. Furthermore, focusing solely on maturity matching can neglect other important risk factors, such as credit risk and operational risk.
In conclusion, the matched book is a valuable risk management tool for institutions engaged in maturity transformation. While achieving a perfect match is often impractical, striving for a near-matched book and employing advanced techniques to manage remaining mismatches can significantly reduce exposure to interest rate and liquidity risks.
1280×675 matched book awesomefintech blog from www.awesomefintech.com 
1042×1600 matched book quotes quotesgram from quotesgram.com 
600×315 matched book book review common sense media from www.commonsensemedia.org 
1800×1200 matched book series favorite books novels match fiction romance novels from www.pinterest.com :max_bytes(150000):strip_icc()/terms_m_matchedbook_FINAL-e4c9830ba60d47e5b50085973fc90279.jpg)
1500×1000 matched book means works from www.investopedia.com 
400×400 blog blog books matched book review from warmfrenchonionsoup.blogspot.com 
780×465 matchbook betting mobile betting review matchedbetscom from www.matchedbets.com 
728×546 book building finance from www.slideshare.net 
580×580 matched book set books poshmark from poshmark.com 
1600×1200 matched book secondhandhk from www.secondhand.hk 
1204×960 match book from goldenkeysscottsdale.org 
160×160 amazoncom matched books from amazon.com 
474×346 matched book definition gabler banklexikon from www.gabler-banklexikon.de 
533×378 add books mat finance bromcom documentation centre from docs.bromcom.com 
1458×1600 book matches stock photo shutterstock from www.shutterstock.com 
1300×1065 match book stock match book stock images alamy from www.alamy.com 
298×386 finance classroom income matching terms fill printable from www.pdffiller.com 
558×167 finance matching match topic correct description loans from www.questionai.com 
1600×1600 jesses girl match book diaries part from amberdunstan.blogspot.com 
1014×1390 match book res stock photography images alamy from www.alamy.com 
1140×660 match book literary advice column sharp eye from www.asharpeye.com 
800×572 match book stock image image match flame souvenir from www.dreamstime.com 
1600×1161 matches match book stock image image space blank from www.dreamstime.com 
1136×918 solved matching match terms list cheggcom from www.chegg.com 
