Certified Financial Management Specialist Practice Exam

Which term refers to the process of converting short-term borrowings into long-term loans?

1. Liquidity Transformation

2. Maturity Transformation

3. Funding Strategy

4. Loan Structuring

The correct answer is: Maturity Transformation

The term that refers to the process of converting short-term borrowings into long-term loans is maturity transformation. This concept is crucial in financial management because it captures the practice where financial institutions, such as banks, take on short-term liabilities (for example, deposits that can be withdrawn at any time) and use those funds to finance long-term assets or loans (like mortgages or business loans). Maturity transformation plays a vital role in the functioning of the financial system, enabling lenders to provide loans for longer durations while covering their immediate funding obligations. This process not only helps in managing liquidity risk but also allows institutions to offer borrowers access to longer-term financing, despite the shorter timeframes of their depositors’ claims. While liquidity transformation involves managing the timing of cash inflows and outflows, it is maturity transformation that specifically focuses on the balance between the timeframes of borrowing and lending. Understanding this distinction is essential in financial management as it highlights how institutions can effectively structure their liabilities and assets to support ongoing operations and meet the needs of both borrowers and savers.