## wp1845

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---

### Objectives and scope
- Investigate the relationship between bank profitability (net interest margin), maturity transformation (maturity mismatch), and policies targeting maturity mismatch.
- Focus on net interest income as a key component of bank profitability.
- Motivate relevance in light of:
  - forthcoming introduction of the NSFR (prudential limit on structural funding risk), similar to an Italian supervisory regulation in place until mid-2000s;
  - suggested time-varying macroprudential use of maturity-mismatch tools by ECB, ESRB, and IMF;
  - expected phasing-out of expansionary monetary policy and subsequent increase in interest rates.

### Methods and empirical strategy
- Model specifications:
  - Static linear model (equation (1)) and dynamic specification with lagged dependent variable (equation (2)); dynamic estimates use Blundell-Bond system GMM.
  - Policy-impact specification (equation (3)) with bank fixed effects to analyze regulatory loosening in Italy.
- Identification of regulatory change:
  - Italian prudential limit on maturity transformation in place from 1993 to 2005 and removed as of June 2006 (treated as an exogenous policy change).
- Definition of constrained (high maturity transformation) banks — two alternatives:
  - (a) Banks that exceeded the pre-existing regulatory limit of 100 at least once after the regulatory change and had an average < 90 during the five years before the change.
  - (b) Banks with average maturity transformation > 100 after the change and average < 90 during the five years before the change.
- Estimation choices:
  - Instrument for bank-specific regressors (except bank size and market concentration) with up to two lags in baseline GMM; macroeconomic variables treated as exogenous.
  - Equation (1)/(2) estimated on sub-period before policy change (June 1999–December 2005).
  - Equation (3) estimated from June 2001 to June 2008 to analyze post-policy effects; fixed-effect estimator used with robust clustered standard errors.

### Data
- Frequency and sample period:
  - Half-yearly individual bank-level data from 1999H1 to 2008H1.
  - Analysis stops at 2008H1 to avoid GFC period distortions.
- Sample size and coverage:
  - Number of banks ranges from 723 (2002H2) to 651 (2008H1).
  - Bank × time observations add up to almost 13,000 (12,894 observations reported for many variables).
  - Sample total assets range from 105.5 percent of GDP in 1999H1 to 156.5 in 2008H1.
  - Sample accounts on average for 81 percent of the Italian banking system assets (range 74 percent in 2007H1 to 87 percent in 2002H1).
- Key sample summary statistics:
  - Observations: 12,894 (Total assets), 12,892 (Net interest margin), 12,833 (Maturity transformation).
  - Total assets: Mean 2,591; Std. Dev. 12,689236 (millions of euro).
  - Net interest margin: Mean 1.56; Std. Dev. 0.49; Median 1.57 (percentage points).
  - Maturity transformation: Mean 59.10; Std. Dev. 23.68; Median 58.31.
  - Interest rate risk: Mean 4.79; Std. Dev. 7.09; Median 3.43.
  - Credit risk: Mean 67.51; Std. Dev. 18.30; Median 66.91.
  - Risk aversion: Mean 11.98; Std. Dev. 15.99; Median 8.58.
  - Operational costs: Mean 1.45; Std. Dev. 0.52; Median 1.41.
  - System-wide (sample means): HH index 2.20 (Std. Dev. 0.42), GDP growth 0.65 (Std. Dev. 0.73), Inflation 2.54 (Std. Dev. 0.47), Short-term rate 3.30 (Std. Dev. 0.94), Yield curve slope 1.32 (Std. Dev. 0.70).
- Constrained banks identified:
  - Definition (a): 153 banks (23.2 percent of the sample at the policy effective date).
  - Definition (b): 74 banks (11.1 percent of the sample).

### Key empirical findings — determinants of net interest margin
- Baseline (system GMM) results (Table 5, specification sub (1)):
  - Maturity transformation coefficient: 0.006*** (standard error 0.002) — positive and statistically significant.
  - Credit risk coefficient: 0.005** (standard error 0.002) — positive and significant.
  - Size coefficient: -0.150*** (standard error 0.020) — negative and significant.
  - Interest rate risk: non-significant in baseline.
- Dynamic specification (sub (3)):
  - Lagged net interest margin (L.nim_ratio) is highly significant: L.nim_ratio 0.507*** (baseline).
  - After adjusting for persistence, long-run coefficients: credit risk effect about 0.008 (about 60 percent higher than short-run estimate), size effect about 0.105 (about 30 percent lower than short-run estimate).
- Macroeconomic controls specification (sub (4)):
  - Short-term rate level: 0.070*** (standard error 0.015) — positive and significant.
  - Yield curve slope level: 0.074*** (standard error 0.020) — positive and significant.
  - Short-run changes (D.Short-term rate): -0.051** (standard error 0.024) — negative short-term effect.
  - D.Yield curve slope: -0.059*** (standard error 0.019) — negative short-term effect.
  - Operational costs: 0.364*** (standard error 0.087) — significant and positive.
  - Herfindahl-Hirschman index: -0.086*** (standard error 0.027) — significant negative.
- Interaction between maturity transformation and yield curve slope (sub (5)):
  - Maturity transformation # Yield curve slope: 0.001** (standard error 0.000) — positive and significant.
- Economic significance (one-standard-deviation impact in dynamic model with time dummies, sub (3) and sub (4)):
  - Lagged component increases margin by 25 percent (sub (3)).
  - Maturity transformation increases margin by 7 percent (sub (3)).
  - Credit risk increases margin by 7 percent (sub (3)).
  - In the dynamic specification with macro controls (sub (4)):
    - Autoregressive term increases margin by 20 percent.
    - Operational costs increase margin by 19 percent.
    - Short-term interest rate and credit risk each increase margin by 7 percent.
    - Maturity transformation and yield curve slope each increase margin by 5 percent.
    - Market concentration decreases margin by 4 percent.

### Findings — effects of Italian regulatory loosening on balance sheet, risk, and net interest margin
- Behavior after policy change (June 2006 removal of limit):
  - Constrained banks increased maturity transformation much faster than unconstrained banks after the change.
- Assets and liabilities composition (Tables 6 & 7):
  - Constrained banks increased long-term assets (remaining maturity > five years) relative to the rest (Policy#high coefficients positive: 0.033*** and 0.028*** for definitions (a) and (b) respectively; policy alone negative).
  - Constrained banks increased the share of mortgage lending (Policy#high positive and significant).
  - On liabilities, constrained banks increased maturity transformation partly via liability-side changes: the share of long-term liabilities increased less for constrained banks than for others (Policy#high negative and significant in long-term liabilities regression).
  - Constrained banks increased the share of fixed-rate long-term assets relative to others after the policy change (Policy#high positive and significant for long-term assets - fixed rate).
- Risk exposure (Table 8):
  - Policy change associated on average with a reduction in interest rate risk (Policy coefficient negative and significant).
  - The decrease in interest rate risk was smaller for constrained banks (Policy#high coefficient positive for interest rate risk), indicating relatively higher interest rate risk exposure for constrained banks after the change.
  - No significant differential effects detected for credit risk measures or risk aversion following the policy change.
- Net interest margin effect of policy change (Table 9, dynamic GMM):
  - Policy coefficient: 0.427* (standard error 0.249) — positive but limited significance.
  - High dummy: non-significant.
  - Interaction Policy#high: -0.067*** (standard error 0.020) for definition (a) and -0.069*** (standard error 0.027) for definition (b) — constrained banks experienced a lower net interest margin after increasing maturity transformation beyond the pre-existing limit.
  - Interpretation: while maturity transformation generally associates positively with net interest margin, an ‘excessive’ maturity transformation (beyond the pre-existing regulatory limit) was associated with a reduction in net interest margin for the constrained banks.

### Policy implications and recommendations
- Main policy-relevant conclusions:
  - Higher maturity transformation is positively associated with banks’ net interest margin in normal times, and this effect is stronger when the yield curve is steeper and short-term rates are higher.
  - Short-term repricing frictions imply that unexpected increases in interest rates and/or yield-curve steepening can have negative short-run effects on net interest margins.
  - Excessive/unregulated maturity transformation can increase risk exposure without improving net interest margin — observed for Italian banks that increased maturity mismatch beyond a prior limit.
- Implications for prudential policy:
  - Adoption of the NSFR (conceptually similar to the Italian regulation) is likely to constrain incentives toward excessive maturity transformation, reducing banks’ riskiness without necessarily harming profitability—provided proper calibration.
  - Smooth monetary policy normalization is preferable to abrupt increases in interest rates to allow banks time to adjust balance sheets and limit negative short-run margin effects.
  - Calibration of NSFR or similar maturity-transformation limits should consider trade-offs between profitability and systemic funding risk; excessive loosenings can lead to higher structural funding risk and lower profitability for some banks.

### Conclusions
- Empirical evidence from Italian bank-level data (1999H1–2008H1) shows:
  - Positive association between contractual maturity transformation and net interest margin.
  - Positive long-run effects of higher short-term interest rates and steeper yield curves on net interest margin, but negative short-run effects due to repricing frictions.
  - Regulatory loosening of a maturity-transformation limit in Italy (removal as of June 2006) induced some banks to increase maturity mismatch; these constrained banks rebalanced assets toward long-term and fixed-rate instruments and increased mortgage lending, resulting in higher interest rate risk exposure and a lower net interest margin relative to other banks.
- Policy takeaway:
  - Higher interest rates and higher maturity transformation can improve net interest margin over time, but a smooth interest-rate normalization and prudential limits (e.g., NSFR) properly calibrated are important to avoid excessive maturity transformation that raises risk without improving profitability.

### Appendix I — The Italian Regulatory Limit on Bank Maturity Transformation
- Background:
  - A regulation to limit bank maturity transformation was introduced by the Italian authorities in 1993 (Limite alla trasformazione delle scadenze) to prevent banks from excessively growing long-term exposures without a proportional lengthening of liabilities.
  - The regulation initially consisted of three rules (mathematical specifications reported in the source) and classified maturities as:
    - Long-term assets and liabilities: maturities longer than 5 years.
    - Medium-term assets and liabilities: maturities between 1.5 and 5 years.
    - Short-term customer liabilities: maturities up to 1.5 year.
    - Interbank liabilities: maturities between 3 months and 1.5 year (Banca d’Italia, 2003).
- 2003 Revision:
  - Regulation simplified in December 2003 by reducing the number of rules to two and recalibrating weightings attached to various assets and liabilities; policy stance unchanged.
  - After the 2003 revision the rules banks had to comply with were the two-rule framework (mathematical specifications reported in the source).
  - All maturities referred to residual contractual maturity; regulation applied at consolidated level.
- Abolition and Aftermath:
  - Regulation abolished in 2006, leaving only the first rule (no longer formally referred to as a limit to maturity transformation) which is so loose as to be extremely unlikely to bind in normal operating conditions.

*Source: wp1845 — IMF working paper content as provided.*

### References .............................................................................................................

### wp1845 - References

### Glossary
- BCBS Basel Committee on Banking Supervision
- ECB European Central Bank
- GFC Global Financial Crisis
- GMM Generalized Methods of Moments
- LCR Liquidity Coverage Ratio
- NPL Nonperforming Loan
- NSFR Net Stable Funding Ratio

### Tables and Figures inventory (as listed in source)
- Tables
  - 1. Description of Variables ......................................................................................................14
  - 2. Sample Composition: Number of Banks and Asset Size .....................................................15
  - 3. Summary Statistics...............................................................................................................15
  - 4. Sample Means by Date ........................................................................................................16
  - 5. Net Interest Margin ..............................................................................................................19
  - 6. Policy Change and Assets and Liabilities Composition ......................................................21
  - 7. Policy Change and Asset and Liability Composition by Interest Rate ................................22
  - 8. Policy Change and Bank Risk Exposure .............................................................................23
  - 9. Policy Change and Net Interest Margin ...............................................................................24
- Figures
  - 1. Average Maturity Transformation by Bank Type ...............................................................10
- Appendix
  - I. The Italian Regulatory Limit on Bank Maturity Transformation .........................................31

### Key concepts and findings from Introduction
- Maturity transformation is identified as a key function of banking, transferring funds from agents in surplus demanding short-term deposits to agents in deficit with long-term financing needs (Hicks, 1946).
- The maturity mismatch allows banks to earn a spread when the yield curve is positively sloped; the greater banks “ride the yield curve,” the higher their profitability typically is during ‘normal’ (non-crisis) periods.
- Excessive maturity mismatch creates funding risk tied to the need to roll-over short-term liabilities; during funding crises, short-term liability costs can soar and negatively affect profitability.
- Excessive maturity transformation exposes banks to tail risks that can threaten individual bank stability and systemic stability (van Rixtel and Gasperini, 2013; Hellwig, 2008).
- The Global Financial Crisis (GFC) is cited as an example where structural funding weaknesses, linked to excessive maturity transformation, were a key driver of bank failures (Vasquez and Federico, 2012; International Monetary Fund, 2013; Bologna, 2015).
- The empirical literature on the relationship between maturity transformation and bank profitability is described as “still very scant.”
- The need for oversight and restrictions on maturity mismatch is acknowledged as a tool to reduce rollover risk and preserve financial stability (Goldstein and Turner, 2004).

### Themes for policy and empirical work (drawn from source emphasis)
- Monitor and limit excessive maturity mismatch to reduce rollover and funding risks.
- Strengthen oversight mechanisms that address structural funding weaknesses to mitigate systemic tail risks.
- Expand empirical research on the relationship between maturity transformation and bank profitability to fill noted gaps in the literature.
- Consider regulatory measures that address both asset and liability composition and interest-rate sensitive components (as implied by tables 6 and 7 on policy change and asset/liability composition).

*Source: wp1845 - References (IMF working paper content as provided).*

### introduction of the Net Stable Funding Ratio (NSFR) by the Basel Committee on Banking

### introduction of the Net Stable Funding Ratio (NSFR) by the Basel Committee on Banking

### Objectives and scope
- Investigate the relationship between bank profitability (net interest margin), maturity transformation (maturity mismatch), and policies targeting maturity mismatch.
- Focus on net interest income as a key component of bank profitability.
- Motivate relevance in light of:
  - forthcoming introduction of the NSFR (prudential limit on structural funding risk), similar to an Italian supervisory regulation in place until mid-2000s;
  - suggested time-varying macroprudential use of maturity-mismatch tools by ECB, ESRB, and IMF;
  - expected phasing-out of expansionary monetary policy and subsequent increase in interest rates.

### Methods and empirical strategy
- Model specifications:
  - Static linear model (equation (1)) and dynamic specification with lagged dependent variable (equation (2)); dynamic estimates use Blundell-Bond system GMM.
  - Policy-impact specification (equation (3)) with bank fixed effects to analyze regulatory loosening in Italy.
- Identification of regulatory change:
  - Italian prudential limit on maturity transformation in place from 1993 to 2005 and removed as of June 2006 (treated as an exogenous policy change).
- Definition of constrained (high maturity transformation) banks — two alternatives:
  - (a) Banks that exceeded the pre-existing regulatory limit of 100 at least once after the regulatory change and had an average < 90 during the five years before the change.
  - (b) Banks with average maturity transformation > 100 after the change and average < 90 during the five years before the change.
- Estimation choices:
  - Instrument for bank-specific regressors (except bank size and market concentration) with up to two lags in baseline GMM; macroeconomic variables treated as exogenous.
  - Equation (1)/(2) estimated on sub-period before policy change (June 1999–December 2005) to avoid post-policy confounding.
  - Equation (3) estimated from June 2001 to June 2008 to analyze post-policy effects; fixed-effect estimator used with robust clustered standard errors.

### Data
- Frequency and sample period:
  - Half-yearly individual bank-level data from 1999H1 to 2008H1.
  - Analysis intentionally stops at 2008H1 to avoid GFC period distortions.
- Sample size and coverage:
  - Number of banks ranges from 723 (2002H2) to 651 (2008H1).
  - Bank × time observations add up to almost 13,000 (12,894 observations reported for many variables).
  - Sample total assets range from 105.5 percent of GDP in 1999H1 to 156.5 in 2008H1.
  - Sample accounts on average for 81 percent of the Italian banking system assets (range 74 percent in 2007H1 to 87 percent in 2002H1).
- Key sample summary statistics (from Table 3; obs and central moments preserved):
  - Observations: 12,894 (Total assets), 12,892 (Net interest margin), 12,833 (Maturity transformation).
  - Total assets: Mean 2,591; Std. Dev. 12,689236 (millions of euro).
  - Net interest margin: Mean 1.56; Std. Dev. 0.49; Median 1.57 (percentage points).
  - Maturity transformation: Mean 59.10; Std. Dev. 23.68; Median 58.31.
  - Interest rate risk: Mean 4.79; Std. Dev. 7.09; Median 3.43.
  - Credit risk: Mean 67.51; Std. Dev. 18.30; Median 66.91.
  - Risk aversion: Mean 11.98; Std. Dev. 15.99; Median 8.58.
  - Operational costs: Mean 1.45; Std. Dev. 0.52; Median 1.41.
  - System-wide (sample means): HH index 2.20 (Std. Dev. 0.42), GDP growth 0.65 (Std. Dev. 0.73), Inflation 2.54 (Std. Dev. 0.47), Short-term rate 3.30 (Std. Dev. 0.94), Yield curve slope 1.32 (Std. Dev. 0.70).
- Constrained banks identified:
  - Definition (a): 153 banks (23.2 percent of the sample at the policy effective date).
  - Definition (b): 74 banks (11.1 percent of the sample).

### Key empirical findings — determinants of net interest margin
- Baseline (system GMM) results (Table 5, specification sub (1)):
  - Maturity transformation coefficient: 0.006*** (standard error 0.002) — positive and statistically significant.
  - Credit risk coefficient: 0.005** (standard error 0.002) — positive and significant.
  - Size coefficient: -0.150*** (standard error 0.020) — negative and significant.
  - Interest rate risk: non-significant in baseline.
- Dynamic specification (sub (3)):
  - Lagged net interest margin (L.nim_ratio) is highly significant: L.nim_ratio 0.507*** (baseline) and in dynamic model shows persistence.
  - After adjusting for persistence, long-run coefficients: credit risk effect about 0.008 (about 60 percent higher than short-run estimate), size effect about 0.105 (about 30 percent lower than short-run estimate).
- Macroeconomic controls specification (sub (4)):
  - Short-term rate level: 0.070*** (standard error 0.015) — positive and significant.
  - Yield curve slope level: 0.074*** (standard error 0.020) — positive and significant.
  - Short-run changes (D.Short-term rate): -0.051** (standard error 0.024) — negative short-term effect.
  - D.Yield curve slope: -0.059*** (standard error 0.019) — negative short-term effect.
  - Operational costs become significant and positive in this specification: 0.364*** (standard error 0.087).
  - Herfindahl-Hirschman index becomes significant with a negative sign: -0.086*** (standard error 0.027).
- Interaction between maturity transformation and yield curve slope (sub (5)):
  - Maturity transformation # Yield curve slope: 0.001** (standard error 0.000) — positive and significant; net interest margin increases more when both maturity transformation and yield curve slope are higher.
- Economic significance (one-standard-deviation impact in dynamic model with time dummies, sub (3)):
  - Lagged component increases margin by 25 percent.
  - Maturity transformation increases margin by 7 percent.
  - Credit risk increases margin by 7 percent.
  - In the dynamic specification with macro controls (sub (4)):
    - Autoregressive term increases margin by 20 percent.
    - Operational costs increase margin by 19 percent.
    - Short-term interest rate and credit risk each increase margin by 7 percent.
    - Maturity transformation and yield curve slope each increase margin by 5 percent.
    - Market concentration decreases margin by 4 percent.

### Findings — effects of Italian regulatory loosening on balance sheet, risk, and net interest margin
- Behavior after policy change (June 2006 removal of limit):
  - Constrained banks increased maturity transformation much faster than unconstrained banks after the change (Figure 1 description).
- Assets and liabilities composition (Table 6 & Table 7):
  - Constrained banks increased long-term assets (remaining maturity > five years) relative to the rest (Policy#high coefficients positive: 0.033*** and 0.028*** for definitions (a) and (b) respectively; policy alone negative).
  - Constrained banks increased the share of mortgage lending (Policy#high positive and significant).
  - On liabilities, constrained banks increased maturity transformation partly via liability-side changes: the share of long-term liabilities increased less for constrained banks than for others (Policy#high negative and significant in long-term liabilities regression).
  - Constrained banks increased the share of fixed-rate long-term assets relative to others after the policy change (Table 7: Policy#high positive and significant for long-term assets - fixed rate).
- Risk exposure (Table 8):
  - Policy change associated on average with a reduction in interest rate risk (Policy coefficient negative and significant).
  - However, the decrease in interest rate risk was smaller for constrained banks (Policy#high coefficient positive for interest rate risk), indicating relatively higher interest rate risk exposure for constrained banks after the change.
  - No significant differential effects detected for credit risk measures or risk aversion following the policy change.
- Net interest margin effect of policy change (Table 9, dynamic GMM):
  - Policy coefficient: 0.427* (standard error 0.249) — positive but with limited significance.
  - High dummy: non-significant.
  - Interaction Policy#high: -0.067*** (standard error 0.020) for definition (a) and -0.069*** (standard error 0.027) for definition (b) — indicates that constrained banks experienced a lower net interest margin after increasing maturity transformation beyond the pre-existing limit.
  - Interpretation: while maturity transformation generally associates positively with net interest margin, an ‘excessive’ maturity transformation (beyond the pre-existing regulatory limit) was associated with a reduction in net interest margin for the constrained banks.

### Policy implications and recommendations
- Main policy-relevant conclusions:
  - Higher maturity transformation is positively associated with banks’ net interest margin in normal times, and this effect is stronger when the yield curve is steeper and short-term rates are higher.
  - Short-term repricing frictions mean that unexpected increases in interest rates and/or yield-curve steepening can have negative short-run effects on net interest margins (negative coefficients on D.Short-term rate and D.Yield curve slope).
  - Excessive/unregulated maturity transformation can increase risk exposure without improving net interest margin — observed for Italian banks that increased maturity mismatch beyond a prior limit.
- Implications for prudential policy:
  - Adoption of the NSFR (conceptually similar to the Italian regulation) is likely to constrain incentives toward excessive maturity transformation, reducing banks’ riskiness without necessarily harming profitability—provided proper calibration.
  - Smooth monetary policy normalization is preferable to abrupt increases in interest rates to allow banks time to adjust balance sheets and limit negative short-run margin effects.
  - Calibration of NSFR or similar maturity-transformation limits should consider trade-offs between profitability and systemic funding risk; excessive loosenings can lead to higher structural funding risk and lower profitability for some banks.

### Conclusions
- Empirical evidence from Italian bank-level data (1999H1–2008H1) shows:
  - Positive association between contractual maturity transformation and net interest margin.
  - Positive long-run effects of higher short-term interest rates and steeper yield curves on net interest margin, but negative short-run effects due to repricing frictions.
  - Regulatory loosening of a maturity-transformation limit in Italy (removal as of June 2006) induced some banks to increase maturity mismatch; these constrained banks rebalanced assets toward long-term and fixed-rate instruments and increased mortgage lending, resulting in higher interest rate risk exposure and a lower net interest margin relative to other banks.
- Policy takeaway:
  - Higher interest rates and higher maturity transformation can improve net interest margin over time, but a smooth interest-rate normalization and prudential limits (e.g., NSFR) properly calibrated are important to avoid excessive maturity transformation that raises risk without improving profitability.

*Source: wp1845 - introduction of the Net Stable Funding Ratio (NSFR) by the Basel Committee on Banking — IMF working paper (content from the provided PDF).*

### References

### References

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### Appendix I. The Italian Regulatory Limit on Bank Maturity Transformation
- Background
  - The institutional reforms of the banking system that took place in Italy at the beginning of the 1990s cleared the way to the universal banking model by abolishing the institutional separation between financial intermediaries providing long-term financing and those focused on short- and medium-term lending.
  - A regulation to limit bank maturity transformation was introduced by the Italian authorities in 1993 (Limite alla trasformazione delle scadenze) with the aim to prevent banks from excessively growing their long-term exposures without a proportional lengthening of the maturity of their liabilities, limiting therefore the possibility to incur in excessive maturity transformation and structural funding risk exposure.1
  - The regulation consisted of the following three rules:
    1. capitalregulatoryassociatesestatereal__
    2. liabcustomertermshort liabtermmediumliabtermlongliabmaturingnonsurassetstermlong ___1.0 __4.0____1__  
    3. )____(2.0 __6.02__ liabbankliabcustomertermshort liabtermmediumsurassetstermmedium  + 
  - Where associatesestaterealcapitalregualtorysur__1
  - and assetstermlongliabcustomertermshort liabtermmediumliabtermlongliabmaturingnonsursur _____1.0 __4.0____12  + 
  - Long-term assets and liabilities: maturities longer than 5 years.
  - Medium-term assets and liabilities: maturities between 1.5 and 5 years.
  - Short-term customer liabilities: maturities up to 1.5 year.
  - Interbank liabilities: maturities between 3 months and 1.5 year (Banca d’Italia, 2003).
- 2003 Revision
  - The regulation was simplified by reducing the number of rules to two in December 2003 (Banca d’Italia, 2003).
  - In the revised framework, the first of the three rules was left unchanged while the second new rule resulted from the combination of the pre-existing second and third rules.
  - A recalibration of the weightings attached to the various assets and liabilities took place to better reflect differences of assets and liabilities maturities, without however any significant implication on the policy stance.
  - After the 2003 revision, the rules that banks had to comply with were the following:
    1. capitalregulatoryassociatesestatereal__
    2. )____(25.0 __5.0__ ____5.0__ liabbankliabcustomertermshort liabtermmediumliabtermlong liabmaturitingnonsurassetstermmediumassetstermlong  +  + +
    - Where associatesestaterealcapitalregualtorysur__
  - All the maturities referred to the residual contractual maturity, which is the relevant time dimension of maturity mismatch to measure the effective maturity transformation. The time to contractual maturity is therefore different from the time to re-pricing, relevant to capture interest rate risk.
  - The regulation was applied at consolidated level only, in order to make it neutral with respect to banks’ organizational choices.
- Abolition and Aftermath
  - The regulation, unique in its nature in the context of the European single market, was then abolished in 2006, leaving in place only the first rule which is no more formally referred to as a limit to maturity transformation (Banca d’Italia, 2013) and that is so loose to be extremely unlikely to become a binding constrain for banks in normal operating conditions.2

*Source: wp1845 - References*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1845.pdf_