Banks’ Maturity Transformation: Risk, Reward, and Policy
44 Pages Posted: 8 Dec 2017
Date Written: December 5, 2017
The aim of this paper is twofold: first, to study the determinants of banks’ net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch; second, to analyse the implications for banks of the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until the mid-2000s. The results show that maturity transformation is an important driver of the net interest margin, as higher maturity transformation is typically associated with higher net interest margin. However, there is a limit to this positive relationship as ‘excessive’ maturity transformation — even without leading to systemic vulnerabilities — has some undesirable implications in terms of higher exposure to interest rate risk and lower net interest margin.
Keywords: banks, profitability, maturity transformation, interest rates, macroprudential, microprudential
JEL Classification: E43, G21, G28
Suggested Citation: Suggested Citation