Whether banks borrow from depositors or from other banks offshore, they "borrow short to lend long". Their maturities are mismatched regardless.
The banks borrow at low interest rates for short periods, and have to refinance these debts periodically over the life of a loan they make.
There maybe lots of complicated Basel formulae for preventing systemic risk but really isn't it all papering over fundamental problems with the banking model?
Also I find it odd how mortgages work. In the first instance, the loan itself is an asset, because it earns interest. But to cover the risk of default, the bank has a mortgage over the property. So that should be enough. But no, the bank then asks the borrower to take out mortgage insurance in case they can't make repayments.
Banks in difficulties have problems well beyond the normal problems of being a distressed seller of assets or liquidating a business no longer as a going concern.
If the bank came into difficulties, they might have to liquidate their assets ie foreclose on borrowers who had actually kept up with payments. But how could they do this without the excuse of raising interest rates - which means raising interest rates for all banks via their front organisation, the central bank. But people losing their houses is political dynamite and to compound the problem, all the banks would end up selling houses at the same time and pop the asset bubble. So the banks in fact are extremely constrained in their ability to liquidate assets to pay off creditors (the depositors and offshore banks).
Therefore banks must have a central bank to lend them money in emergencies and raise interest rates on their behalf. The banks naturally operate as a cartel, blowing asset bubbles together and then, who would have thought it, the asset bubbles pop or deflate and the central bank comes to their rescue.
It is like a bank balance sheet full of mortgages is really an accounting fiction because the assets can never be liquidated in time to pay off their short term borrowings for anything like the book value.
