When the maturities of assets and liabilities aren’t matched, the bank could experience a cash flow shortfall.
For example, let’s say a bank uses short-term borrowing (a one-year note) to finance long-term assets (30-year loans) because short-term borrowing generally costs less than long-term borrowing. However, this presents a problem: the one-year note will need to be repaid before the bank collects the principal from the 30-year loans. If the bank can roll over the short-term debt, it can continue to finance the 30-year loans. But what if the bank can’t roll over the debt when it comes due, and the bank can’t find an alternative source of funds? The bank wouldn’t have cash to repay the debt (since the loan principal is still outstanding) and would run out of cash. This mismatch between asset and liability cash flows is called the cash flow gap (it’s also known as the maturity gap).
To avoid this outcome, banks try to match asset and liability positions so there are always sufficient funds to cover short-term liabilities that mature.
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