Via governance, financial intermediaries can completely mitigate risks associated with maturity mismatch

Question

BlackTom AI · Accepted Answer

Consider the statement in question: 'Via governance, financial intermediaries can completely mitigate risks associated with maturity mismatch.'
Option True: If we try to defend this, we might argue that strong governance frameworks, robust risk management, and well-designed liquidity policies can significantly reduce maturity-mismatch risk. However, the claim of complete mitigation is too strong; governance can reduce exposure but cannot eliminate all risk since funding gaps, liquidity shocks, or unexpected defaults can still occur. Therefore, this option generally overstates what governance can achieve.
Option False: This choice reflects the practical reality that while governance improves oversight and risk controls, it cannot guarantee the complete elimination of maturity-mismatch risk. Maturity mismatch arises from the fundamental timing differences between asset and liability cash flows, and external events (market stress, funding liquidity squeezes, or rating changes) can still create residual risk even under strong governance. Hence, governance reduces but does not completely remove the risk, making this statement more accurate.
Additional nuance: In financial intermediation, risk mitigation is a spectrum rather than an absolute. Controls such as diversification, funding diversification, liquidity buffers, stress testing, and governance committees lower the probability and impact of mismatches, but they cannot nullify the inherent timing risk across asset and liability maturities.
In summary, the claim that governance can completely mitigate maturity-mismatch risks is overly optimistic because governance can improve risk posture without guaranteeing absolute risk elimination. The more defensible stance is that governance reduces risk, not eliminates it entirely.

BFF5916 - S1 2025 Online Learning Exercise N. 1 - Weeks 3-4

Via governance, financial intermediaries can completely mitigate risks associated with maturity mismatch

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