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

Format:

Book

Author/Creator:

Drechsler, Itamar.

Contributor:

National Bureau of Economic Research.

Savov, Alexi.

Schnabl, Philipp.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24582.

NBER working paper series no. w24582

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Banking on Deposits

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

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.

Notes:

Print version record

May 2018.