A Macro-Financial Perspective to Analyse Maturity Mismatch and Default

Tinbergen Institute Discussion Paper 2020-064/IV

36 Pages Posted: 12 Nov 2020

See all articles by Xuan Wang

Xuan Wang

VU University Amsterdam; Tinbergen Institute; University of Oxford - Said Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2020

Abstract

The Basel Committee proposed the Net Stable Funding Ratio (NSFR) to curb excessive maturity mismatch of the banking sector. However, it remains to be ascertained as to what are the financial and real effects of the NSFR on banks' credit quality, investment, and the pass-through of monetary policy. This paper develops a nominal dynamic general equilibrium featuring banks' maturity mismatch and the moral hazard due to costly monitoring. First, I show that a tightening of the NSFR to move loan maturity towards the long-run capital investment cycle would only increase real investment if it sufficiently improves banks' credit quality. Then in the numerical example calibrated with the US data, I show that such tightening of the NSFR can indeed increase real investment and also reduce the aggregate fluctuation of the economy. In the steady states, a 10% tightening in the NSFR can decrease net charge-offs of non-performing loans by about 0.06 pp annually, despite squeezing banks' interest margin. Moreover, the moral hazard stemming from banks' unobserved monitoring effort impairs the pass-through of monetary policy. However, a 10% tightening in the NSFR improves the pass-through of a 20-bp policy rate reduction by around 17% annually. Finally, the model simulates the stochastic dynamic equilibrium path to study the propagation of shocks, demonstrating that the NSFR complements monetary policy in reducing financial frictions.

Keywords: Maturity Mismatch, Net Stable Funding Ratio, Default, Banking, Monetary Policy, Macro-Prudential Policy

JEL Classification: E44, E51, G18, G21

Suggested Citation

Wang, Xuan, A Macro-Financial Perspective to Analyse Maturity Mismatch and Default (September 19, 2020). Tinbergen Institute Discussion Paper 2020-064/IV, Available at SSRN: https://ssrn.com/abstract=3697512 or http://dx.doi.org/10.2139/ssrn.3697512

Xuan Wang (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

HOME PAGE: http://https://sites.google.com/view/xuan-wang

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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