This scenario exposes banks to various risks, key of which is mismatching risks between assets and liabilities, as liabilities are often of a shorter duration whilst assets are often of a longer duration.
This can lead to bank liquidity and funding crises where a bank may not be able to raise funds at short notice when needed to finance any outflow of deposits. This has been the case with the recent Silicon Valley Bank (“SVB”) failure in the United States in March 2023, due to what is known as “a run on the bank” as customers demanded their deposits at a time when the Bank was short of cash and liquid assets, and could not raise fresh capital at short notice. This was the second largest US bank failure behind Washington Mutual that collapsed in 2008.
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