In our example of the commercial bank, two things should be noted. First, the maturity of the deposits made by lenders at the commercial bank are typically short term. As explained later, banks have deposits that are payable upon demand or have a specific maturity date, but most are less than three years. Second, the maturity of the loans made by a commercial bank may be considerably longer than three years. Think about what would happen if commercial banks did not exist in a financial system. In this scenario, borrowers would have to either (1) borrow for a shorter to term in order to match the length of time lenders are willing to loan funds; or (2) locate lenders that are willing to invest for the length of the loan sought.
Now put commercial banks back into the financial system. By issuing its own financial claims, the commercial bank in essence transforms a longer-term asset into a shorter-term one by giving the borrower a loan for the length of time sought and the depositor (lender) a financial asset for the desired investment horizon. This function of a financial intermediary is called maturity intermediation.
The implications of maturity intermediation for financial systems are twofold. The first implication is that lenders/investors have more choices with respect to the maturity for the financial instruments in which they invest and borrowers have more alternatives for the length of their debt obligations. The second implication is that because investors are reluctant to commit funds for a long period of time, they require long-term borrowers to pay a higher interest rate than on short-term borrowing. However, a financial intermediary is willing to make longer-term loans, and at a lower cost to the borrower than an individual investor would because the financial intermediary can rely on successive funding sources over a long time period (although at some risk). For example, a depository institution can reasonably expect to have successive deposits to be able to fund a longer-term investment. As a result, the cost of longer-term borrowing is likely to be reduced in an economy with financial intermediaries.