How Excessive Is Banks’ Maturity Transformation?

Abstract

We quantify the gains from regulating banks’ maturity transformation in an infinite horizon model of banks which finance long-term assets with non-tradable debt. Banks choose the amount and maturity of their debt trading off investors’ preference for short maturities with the risk of systemic crises. As in Stein (2012), pecuniary externalities make unregulated debt maturities inefficiently short. The assessment is based on the calibration of the model to Eurozone banking data for 2006. Lengthening the average maturity of wholesale debt from its 2.8 months to 3.3 months would produce welfare gains with a present value of euro 105 billion.

Keywords: liquidity risk, maturity regulation, pecuniary externalities, systemic crises

JEL Classification: G01, G21, G28