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
Hlavní autoři: DRECHSLER, ITAMAR, SAVOV, ALEXI, SCHNABL, PHILIPP
Médium: Journal Article
Jazyk:angličtina
Vydáno: Cambridge Wiley Periodicals LLC 01.06.2021
Wiley Subscription Services, Inc
Blackwell Publishers Inc
Témata:
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
ISSN:0022-1082, 1540-6261
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Shrnutí: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.
Bibliografie: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.
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ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.13013