> Banks engage in maturity transformation, in “borrowing short and lending long.” Deposits are short-term liabilities of the bank; while time-locked deposits ex

> Banks engage in maturity transformation, in “borrowing short and lending long.” Deposits are short-term liabilities of the bank; while time-locked deposits exist, broadly users can ask for them back on demand. Most assets of a bank, the loans or securities portfolio, have a much longer duration. > Society depends on this mismatch existing. It must exist somewhere. The alternative is a much poorer and riskier world, which includes dystopian instruments that are so obviously bad you’d have to invent names for them. I guess I'll dispute this. It is useful that this mismatch exists, since it (1) lowers the cost of long-term borrowing for mortgagors, businesses, and governments and (2) lowers the (direct and/or opportunity) cost of holding cash. But I don't think society is dependent on this mismatch, and I don't think the alternative would be anywhere near as bleak as Patrick suggests. If bank regulators changed capital requirements to require banks to fully back deposits with cash equivalents, long-term borrowing would be a lot more expensive, but the market would still clear. There's already plenty of demand for safe long-term debt, and that demand would only increase as long-term interest rates went up. E.g., if checking accounts paid -2% interest and CDs paid 10%, lenders would put less money in checking and more in CDs, even if it meant they would have to sell the CD at a discount if they needed liquidity. Of course, the US government will take any and every opportunity it can get to indirectly subsidize mortgages, so this is pretty moot in practice.