Furthermore, the short-term profits obtained through trading activities hide risks which may materialise over the medium term and weaken banks’ profits over time. This second factor appears to be widely underestimated, as banks seem to be conducting carry trades – including those in the same currency which exploit maturity mismatches, i.e.
borrowing short-term to buy long-term bonds – on the assumption that such activities are risk-free. Experience shows instead that the short-term gains of such trades may be eroded by capital losses at a later stage, resulting from changes in short-term financing conditions and in the underlying value of the asset.