Banks’ Maturity Transformation: Risk, Reward, and Policy

44 Pages Posted: 8 Dec 2017

Date Written: December 5, 2017

Abstract

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

Bologna, Pierluigi, Banks’ Maturity Transformation: Risk, Reward, and Policy (December 5, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1159. Available at SSRN: https://ssrn.com/abstract=3084058 or http://dx.doi.org/10.2139/ssrn.3084058

Pierluigi Bologna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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