Maturity transformation in relation to financial services is:

• A. Method of diversifying investment risk
• B. Turning short-term deposits and savings into longer-term loans
• C. A form of regulatory intervention
• D. A facility to allow the easy payment of bills

Answer: (B)

Maturity transformation is the practice of turning short-term funds into long-term loans. By taking deposits and savings that can be withdrawn on short notice and using those funds to finance longer-term lending, financial institutions bridge the gap between the short horizon of liabilities and the longer horizon of assets. This enables households and businesses to access long-term financing (like mortgages and business loans) while savers provide funds suitable for shorter periods. It also introduces liquidity risk if a surge in withdrawals can’t be met by liquidating long-term assets quickly. The other options describe different ideas: diversifying risk, regulatory actions, or a payment service, none of which capture the transformation of maturities.