Why is bank debt maturity shorter than subordinated debt maturity?

• A. Bank debt is cheaper because of its seniority and aligns with shorter bank deposits
• B. Subordinated debt always has shorter maturity
• C. Banks prefer long-term debt
• D. There is no reason; maturities are random

Answer: (A)

Debt maturity patterns reflect both risk and funding sources. Bank debt is senior to subordinated debt, so lenders face far lower default risk and require a lower return to lend to the bank. That reduced risk translates into cheaper funding. Banks fund a large share of their liabilities with deposits and other short-term sources, so it makes sense to issue debt with shorter maturities to match this liquidity profile and maintain a robust balance sheet. Subordinated debt, being lower in the repayment priority, carries more risk for investors, who demand higher yields. To attract investors, issuers often use longer maturities and structure the debt to match long-term capital needs. So the combination of seniority and alignment with short-term deposits explains why bank debt maturities tend to be shorter.