Unmatched Book

Maturity mismatch: definition and overview

A maturity mismatch (also called an asset–liability mismatch) occurs when the timing of cash inflows from a company’s assets does not align with the timing of cash outflows required to meet its liabilities. Commonly this means short-term liabilities exceed short-term assets, but mismatches can also arise when long-term assets are funded with short-term liabilities or when hedging instruments and underlying assets have different maturities.

Why it matters

Maturity mismatches affect liquidity and financial stability. If cash obligations come due before corresponding asset cash flows, the firm may face funding shortfalls, forced asset sales, higher borrowing costs, or default. Mismatches also expose firms to interest-rate, refinancing, and market risks.

How mismatches arise

• Balance-sheet funding gaps: using short-term funding (e.g., deposits or commercial paper) to finance long-term lending or capital projects.
• Hedging misalignment: a hedge instrument expires earlier or later than the underlying exposure, creating an imperfect hedge.
• Project and CapEx timing: borrowing for projects whose revenue or cash generation begins far in the future.
• Concentration of maturities: multiple liabilities maturing in the same near-term window.

Risks and consequences

• Liquidity shortfalls and the need for emergency funding
• Forced liquidation of assets at unfavorable prices
• Higher borrowing costs or loss of access to markets
• Credit-rating downgrades and reputational damage
• Increased interest-rate and refinancing risk

Prevention and management

Effective asset–liability management (ALM) reduces maturity-mismatch risk. Common practices include:

• Monitor and map maturity schedules for assets, liabilities, and off‑balance-sheet exposures.
• Match expected cash inflows to known payment obligations where practical.
• Stagger maturities to avoid concentrated refinancing needs.
• Maintain sufficient liquid reserves and committed credit lines for contingencies.
• Use appropriately timed hedges and review hedge maturities regularly.
• Lengthen funding profiles via longer-term debt or capital where feasible.
• Conduct stress tests and liquidity scenario analyses to evaluate vulnerability.
• Diversify funding sources to reduce dependence on any single market or investor type.

Special considerations

Exact maturity matching is often impractical and not always desirable. Financial intermediaries such as banks deliberately engage in maturity transformation—borrowing short and lending long—to earn a spread (net interest margin). That practice can be profitable but requires robust liquidity and risk management to prevent vulnerabilities from turning into solvency problems.

Example

A homebuilder facing near-term debt maturities may issue longer-dated notes to refinance short-term obligations. That extends the repayment schedule and relieves immediate liquidity pressure, but it does not eliminate the underlying risk if future cash flows remain uncertain.

Key takeaways

• A maturity mismatch exists when asset cash flows and liability cash flows are not aligned in time.
• Mismatches can undermine liquidity and increase refinancing and market risk.
• Active asset–liability management, liquidity buffers, sensible hedging, and diversified funding help prevent or mitigate mismatches.
• Some maturity transformation is intentional (e.g., banking spreads) but requires careful risk controls.