Banking on Deposits: Maturity Transformation Without Interest Rate Risk

92 Pages Posted: 22 Mar 2017 Last revised: 29 Jul 2020

See all articles by Itamar Drechsler

Itamar Drechsler

Wharton School, Department of Finance; National Bureau of Economic Research (NBER)

Alexi Savov

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Philipp Schnabl

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 30, 2019

Abstract

We show that maturity transformation does not expose banks to interest rate risk---it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, i.e. to lend long-term at fixed rates. As predicted by this theory, we show that banks closely match the interest-rate sensitivities of their income and expenses, and that this insulates their equity from interest rate shocks. Our results provide an explanation for why banks supply long-term credit.

Keywords: Banks, maturity transformation, deposits, interest rate risk

JEL Classification: E52, E43, G21, G31

Suggested Citation

Drechsler, Itamar and Savov, Alexi and Schnabl, Philipp, Banking on Deposits: Maturity Transformation Without Interest Rate Risk (December 30, 2019). Available at SSRN: https://ssrn.com/abstract=2938236 or http://dx.doi.org/10.2139/ssrn.2938236

Itamar Drechsler

Wharton School, Department of Finance ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://https://sites.google.com/site/idrechsl/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexi Savov (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Philipp Schnabl

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/pschnabl/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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