If nothing else, the core business of the bank is about borrowing cheaply (hence short term) and making risky, long term loans (hence bringing in interest).
If they want to finance the loans by long term loans themselves, much of the profit goes away and the business isn't sustainable.
It's obviously a sliding scale but that's the starting point.
Well, profit can always be increased by increasing risk. So the question is whether the additional risk incurred due to duration mismatch is worth the increase in profits.
It's obviously worth it to the bank's shareholders if the bank is bailed out by tax payers when things go wrong. But if there's no bailout it may not be worth it for them -- at least not in the long run.
If nothing else, the core business of the bank is about borrowing cheaply (hence short term) and making risky, long term loans (hence bringing in interest).
If they want to finance the loans by long term loans themselves, much of the profit goes away and the business isn't sustainable.
It's obviously a sliding scale but that's the starting point.