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

See all articles by Mariela Dal Borgo

Mariela Dal Borgo

Bank of Mexico, Financial Stability Directorate

Date Written: July 21, 2019

Abstract

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

Dal Borgo, Mariela, Modelling Demand Deposits and Interest Rate Risk Sharing: Lessons from the Mexican Banking Regulation (July 21, 2019). Available at SSRN: https://ssrn.com/abstract=3270314 or http://dx.doi.org/10.2139/ssrn.3270314

Mariela Dal Borgo (Contact Author)

Bank of Mexico, Financial Stability Directorate ( email )

Av. 5 de Mayo 2
Mexico City, 06059
Mexico

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