Banking on Deposits: Maturity Transformation without Interest Rate Risk
We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also...
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| Vydáno v: | The Journal of finance (New York) Ročník 76; číslo 3; s. 1091 - 1143 |
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| Hlavní autoři: | , , |
| Médium: | Journal Article |
| Jazyk: | angličtina |
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Cambridge
Wiley Periodicals LLC
01.06.2021
Wiley Subscription Services, Inc Blackwell Publishers Inc |
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| ISSN: | 0022-1082, 1540-6261 |
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| Abstract | We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long-term credit. |
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| AbstractList | We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long-term credit. ABSTRACT We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit. We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit. |
| Audience | Academic |
| Author | SAVOV, ALEXI SCHNABL, PHILIPP DRECHSLER, ITAMAR |
| Author_xml | – sequence: 1 givenname: ITAMAR surname: DRECHSLER fullname: DRECHSLER, ITAMAR – sequence: 2 givenname: ALEXI surname: SAVOV fullname: SAVOV, ALEXI – sequence: 3 givenname: PHILIPP surname: SCHNABL fullname: SCHNABL, PHILIPP |
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| Copyright | 2021 the American Finance Association COPYRIGHT 2021 Blackwell Publishers Ltd. |
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| Notes | Itamar Drechsler is at the Wharton School, University of Pennsylvania. Alexi Savov and Philipp Schnabl are at New York University Stern School of Business. Itamar Drechsler and Alexi Savov are also with NBER. Philipp Schnabl is also with NBER and CEPR. We thank Markus Brunnermeier, Eduardo Dávila, John Driscoll, Mark Egan, Andreas Fuster, Mark Flannery, Raj Iyer, Arvind Krishnamurthy, Anna Kovner, Yueran Ma, Gregor Matvos, Monika Piazzesi, Anthony Saunders, David Scharfstein, Andrei Shleifer, Philip Strahan, Adi Sunderam, Bruce Tuckman, James Vickery, and seminar participants at the American Economic Association Meeting, BIS Research Meeting, Brandeis University, Carnegie Mellon, Chinese University in Hong Kong, ECB Monetary Policy Forum, FDIC, FRB Chicago, FRB New York, FRB Philadelphia, FRB San Francisco, Federal Reserve Board, Hong Kong University of Science and Technology, International Research Forum on Monetary Policy, LBS Summer Symposium, MIT Macroeconomics Seminar, NBER Summer Institute Corporate Finance, NBER Monetary Economics, Northwestern Macroeconomics Seminar, Ohio State University, Office of Financial Research, Princeton University, Purdue University, SITE, University of Amsterdam, University of Michigan, University of Pittsburgh, University of Rochester, and Yale University for their comments. We are also grateful for comments from two anonymous referees, the Associate Editor, and the Editor. We thank Patrick Farrell, Manasa Gopal, Pauline Liang, and Andrew Teodorescu for excellent research assistance. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose. ObjectType-Article-1 SourceType-Scholarly Journals-1 ObjectType-Feature-2 content type line 14 |
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| Snippet | We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay... ABSTRACT We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks... We show that maturity transformation does not expose banks to interest rate risk-it hedges it. The reason is the deposit franchise, which allows banks to pay... |
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| SubjectTerms | Bank deposits Bank earnings Banking Business schools Financial disclosure Franchises Hedges Hedging Hedging (Finance) Income Interest income Interest rate risk Interest rates Macroeconomics Maturity Monetary policy Seminars Transformation |
| Title | Banking on Deposits: Maturity Transformation without Interest Rate Risk |
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