Abstract
Since the primary activity of banking is the intermediation between borrowers and lenders, its core business is the transformation of collected deposits into distributed loans. This process generates a net interest margin in the profit and loss statement but engenders financial risks in the balance-sheet. Indeed, the asset-liability mismatches about maturity (short term vs. long term), interest rate (certain rate vs. uncertain rate) and currency, (domestic vs. foreign) respectively provoke liquidity risk, interest rate risk and currency risk. Thus, banks want to maximize their profit and minimize their risk. However, if risk taking is rewarded by an expected risk premium, it also causes instability for the financial institution as well as for the whole financial system.
