What is a Matched Book?

A matched book is a situation where a bank or other type of financial institution has an equitable distribution or match between the maturity dates of its assets and its liabilities. Sometimes referred to as asset/liability management, an institution that currently enjoys a matched book is considered to be financially stable and a good risk. This type of balance is a strong indicator that the institution carries a lower default risk, and that any defaults that do take place are likely to have no more than minimal impact on the overall stability of the lender.

Investors often look closely at the relationship between assets and liabilities when considering the possibility of investing in a financial institution, or even purchasing securities offered by an institution. The idea is to determine if the balance between the maturity of liabilities and assets is arranged in a way that helps to ensure the ongoing ability of the institution to function. Should a matched book situation exist, and the institution has a strong history of consistently remaining profitable, an investor is likely to consider the risk minimal in comparison to the potential returns.

Financial institutions seek to maintain a matched book as part of their risk management strategies. While creating this type of balance between the maturities of liabilities and assets can be more difficult in certain economic clients, the effort can make a significant difference in how well a bank or similar institution fares during a recession or a period of economic depression. This is because the costs that are created as part of the lending process is being offset by the collection of interest on loans that are already active. The end result is that by qualifying those loans so the potential for default is minimized, the bank is able to endure and eventually emerge at the end of the economic crisis in relatively stable condition.

In seeking to create a matched book, institutions must comply with governmental regulations regarding the creation of contractual agreements, rates of interest that may be charged on loans, and any types of fees or charges that apply to services offered by customers in general. To a degree, remaining in compliance is actually helpful to the process of achieving a matched book, since those regulations apply to all competing banks and financial institutions. Compliance tends to also generate a reciprocal effect when those regulations are designed to protect the interests of consumers, lenders, and the economy in general.