Asset–liability maturity mismatches and banking fragility risk

Purpose The objective of this study is to examine the role of the negative asset–liability gaps on banking fragility in India. Design/methodology/approach The study is based on the maturity profile of assets and liabilities of all public and private commercial banks from 2013 to 2023 in India. The study examines the impact of negative asset–liability gaps on bank fragility using a logit model. The authors identify fragile banks using the Z-score, an established measure in banking fragility. The robustness of these results is verified by using alternative fragility measures, i.e. coverage ratio, and analysis based on bank ownership, bank size and a breakpoint. Findings The authors find interest and liquidity risks evidenced in negative asset–liability maturity gaps across short- and medium-term maturities apart from non-performing assets aggravated banking fragility in India. Asset–liability maturity mismatches are leading indicators that act as early warning signals in flagging bank fragility. The findings are robust even when we use coverage ratio as an alternative measure of financial fragility. Originality/value Existing metrics of bank fragility, such as CAMELS model and stress tests, are lagged indicators of bank fragility. The current study presents negative asset–liability maturity mismatch as a leading indicator of bank fragility apart from non-performing asset of banks. While earlier studies attribute banking failures to credit risk and liquidity risk, this study also underscored the importance of asset–liability management for prudent risk management.