Modelling Demand Deposits and Interest Rate Risk Sharing: Lessons from the Mexican Banking Regulation
68 Pages Posted: 12 Dec 2018 Last revised: 22 Jul 2019
Date Written: July 21, 2019
This study investigates banks' ability to lengthen the regulatory measure of deposits' maturity using an internal rather than the standardized model. Banks adopt the internal model to reduce the regulatory measure of interest rate risk, based on the maturity gap between assets and liabilities. In line with that, I find that stable deposits and higher holdings of long-term, fixed rate assets lead to adopt the internal model earlier: The regulatory maturity gap is overestimated when the liability maturity is underestimated by the standardized approach. Following its adoption, banks could increase asset repricing maturity further without increasing the risk measure. Using micro data on the universe of commercial and mortgage loans and securities for more than seven years, I find that the internal model allows to increase the repricing maturity of commercial loans when a flattening of the yield curve triggers the demand for fixed rate, long-term debt.
Keywords: maturity gap, interest rate risk, banks, regulatory capital, demand deposits, repricing maturity
JEL Classification: E43, G21, G28
Suggested Citation: Suggested Citation