Banking on Deposits: Maturity Transformation without Interest Rate Risk / Itamar Drechsler, Alexi Savov, Philipp Schnabl.

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Drechsler, Itamar

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w24582.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We show that maturity transformation does not expose banks to significant interest rate risk|it hedges it. This is due to banks' deposit franchise. The deposit franchise gives banks substantial market power over deposits, allowing them to pay deposit rates that are low and insensitive to market interest rates. Maintaining this power requires banks to incur large, interest-insensitive operating costs, so that the total costs of deposits are similar to fixed-rate, long-term debt. Hedging these costs therefore requires banks to lend long term|i.e., to do maturity transformation. As predicted by this theory, we document that banks' net interest margins have been highly stable and insensitive to interest rates, and banks' net worth is largely insulated from monetary policy shocks. We further show that banks match the interest-rate sensitivities of their expenses and income one-for-one, so that banks with less interest-sensitive deposits (more market power) hold assets with substantially longer duration. Our results show that deposits are special because they are short-term and yet have interest-insensitive costs, which explains why banks are able to supply long-term credit.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w24582 (Browse shelf(Opens below))	Not For Loan

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May 2018.

We show that maturity transformation does not expose banks to significant interest rate risk|it hedges it. This is due to banks' deposit franchise. The deposit franchise gives banks substantial market power over deposits, allowing them to pay deposit rates that are low and insensitive to market interest rates. Maintaining this power requires banks to incur large, interest-insensitive operating costs, so that the total costs of deposits are similar to fixed-rate, long-term debt. Hedging these costs therefore requires banks to lend long term|i.e., to do maturity transformation. As predicted by this theory, we document that banks' net interest margins have been highly stable and insensitive to interest rates, and banks' net worth is largely insulated from monetary policy shocks. We further show that banks match the interest-rate sensitivities of their expenses and income one-for-one, so that banks with less interest-sensitive deposits (more market power) hold assets with substantially longer duration. Our results show that deposits are special because they are short-term and yet have interest-insensitive costs, which explains why banks are able to supply long-term credit.