The Golden Rule of Banking Is Designed To Prevent Insolvency

For much of its history, banking abided by a “golden rule” that is still alluded to today but rarely followed: the duration to maturity of a bank’s assets should correspond to that of its liabilities. Any incongruence opens the bank to risk in the event of liquidity shocks. . . .

The golden rule was still upheld at the turn of the last century. Ludwig von Mises, building upon his German predecessor Karl Knies, expanded on this sound banking rule:

For the activity of the banks as negotiators of credit the golden rule holds, that an organic connection must be created between the credit transactions and the debit transactions. The credit that the bank grants must correspond quantitatively and qualitatively to the credit that it takes up. More exactly expressed, “The date on which the bank’s obligations fall due must not precede the date on which its corresponding claims can be realized.” Only thus can the danger of insolvency be avoided.

--Philipp Bagus and David Howden, Deep Freeze: Iceland's Economic Collapse (Auburn, AL: Ludwig von Mises Institute, 2011), 8.