One of the most common uses of a tenor basis swap is to efficiently match the different floating rate tenors of a bank's assets and its liabilities. This enables the bank to better manage its interest rate risk without needing to restructure the underlying positions of all of its assets and liabilities. In this example, we have a bank that holds two key positions. On the liability side, the bank has funding that is linked to a three month floating rate tenor and has a spread of B.

The bank pays to the funder, but on the asset side, the bank holds a mortgage portfolio, which it earns money from, which is tied to a one month floating rate tenor, which has a spread of A, the bank faces a mismatch between the tenors of its assets and liabilities, creating interest rate risk exposure. To solve this problem, the bank can enter into a 1s/3s tenor basis swap. This swap allows the bank to exchange cash flows tied to the one month rate from the mortgage portfolio, plus a spread of X. For cash flows tied to the three month rate linked to the bank's funding. With the tenor basis swap in place, all EURIBOR payments cancel out because both legs of the swap involve floating rates the one month and the three month EURIBOR. What's left after canceling the EURIBOR components is A, the spread over one month EURIBOR coming in from the mortgage portfolio. B, the spread over three month EURIBOR going out to the bank's funding and X the spread on the tenor basis swap, more specifically the spread the bank has to pay on top of one month EURIBOR to compensate for the risk and uncertainty on the three month leg. So the net interest margin is the bank's mortgage portfolio income, minus the bank's funding cost minus the tenor basis swap spread. In simpler terms, it's what the bank earns on its mortgage portfolio. After paying both its funding costs and the spread on the tenor basis swap. In doing so, the bank effectively cancels out the risk created by the mismatch between the two tenors. It pays a small spread denoted as X to compensate for the difference between the two rates. And in return, it can align the interest rate cash flows from its mortgage portfolio with its funding cash flows, thereby minimizing its exposure to rate movements. The benefit of this approach is that the bank doesn't need to restructure its entire balance sheet. Instead of altering its funding or mortgage portfolio, it can simply use the tenor basis, swap as a risk management tool, aligning the cash flows without having to change the core assets or liabilities. By using the tenor basis, swap the bank ensures that its net interest margin remains predictable and stable with the swap, simply adding the cost of the spread X to its overall funding expenses. The swap allows the bank to maintain consistency between the cash inflows from the mortgage portfolio and the cash outflows tied to its funding, thus reducing risk.