RBA deputy governor, Philip Lowe, gave a speech last week that outlined the importance of maturity transformation or transforming illiquid long-term assets into shorter-term liquid assets and said, “The best, and most obvious, example, of this type of transformation is an at-call bank deposit…The holder of a deposit has a completely liquid claim on the bank. The full face value of the deposit can be drawn on at any time, for any purpose. Yet deposits are primarily invested in assets, namely bank loans, which, typically, are not particularly liquid and have long maturities.”
Lowe also discussed other forms of maturity transformation including that done by investment funds, which provide money at-call or near to at-call but invest in comparatively illiquid assets. Lowe made five core points including: ensuring investors understand the nature of the liquidity promise being made, the need for clarity in the process for freezing redemptions, the need for separation between bank-managed investment funds and the bank owners, the need for frequently updated pricing on investments, past runs on investment trusts and the freezes that followed did not lead to systemic problems in the financial system. In neither of the cases highlighted by Lowe was there a significant fire-sale of assets.