Explain in your own words how a commercial bank's asset transformation function implies greater exposure to the risk of interest rate changes, making sure you make use of the concept of duration in your answer.

Asset transformation is the process of transforming bank liabilities (deposits) into bank assets (loans). This is the simple way to explain Asset transformation in banks. Then we want to know why this is done or how it make an impact in the banking transaction. Inorder to answer these question lets come to the point of interest rate in banks. We know that there are different interest rates are charged and provided by banks for deposits and loans. We know that banks will usually gives lesser percentage of interest to the deposit comparing to the interest charged for the loans. So when we analyse these both situation we can identify the strategy behind it. In asset transformation banks do transformation of deposit into loans. So here with the same amount they will get an extra benefit of interest . They can charge more interest for the loans which are provided using the deposit money. This is the exposure banks get from this process.