Match Funded
What does it mean
Match Funding refers to the practice of the bank funding a loan by borrowing its own loan rather than utilizing its deposits. When the bank takes out a loan, it will match the length of its loan with the borrower's loan. For example, if the borrower wanted a 10 year fixed rate loan, the bank could obtain its own 10 year fixed rate loan and use that funding to match fund the proposed loan.
Why does it matter
Generally banks fund loans with their deposits. Most of the time, these deposits are subject to market price changes at any time. Due to this, a bank gets nervous setting up a loan rate with a long term fixed rate because it is funding this loan with short term deposits, and the market rate for these deposits could change during the term of the loan. To protect itself from this risk, a bank can match fund the loan by taking out a loan of the same amount for the same time period from an entity such as the Federal Home Loan Bank. By doing this, the bank does not have the Interest Rate Risk like if it were to fund the loan with general deposits because the loan rate and the funding rate are both for the same period of time.
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