Banks’ Maturity Transformation: Risk, Reward, and Policy

IMF Working Papers, March 9, 2018

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Banks’ Maturity Transformation: Risk, Reward, and Policy

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Bibliographic details

• Authors: Pierluigi Bologna
• Published: March 9, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484345184.001

Aim and scope

• Authors: Pierluigi Bologna
• Publication date: March 9, 2018
• Series: Working Paper No. 2018/045
• Volume: 2018
• Issue: 045
• Pages: 32
• DOI: https://doi.org/10.5089/9781484345184.001
• ISBN: 9781484345184
• ISSN: 1018-5941
• Primary aims:
  • To study the determinants of banks’ net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch.
  • To analyse the implications for banks from the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until mid-2000s.

Key findings

• Maturity transformation is a relevant driver of the net interest margin.
• Higher maturity transformation is typically associated with higher net interest margin.
• ‘Excessive’ maturity transformation—even without leading to systemic vulnerabilities—:
  • increases banks’ interest rate risk exposure, and
  • lowers their net interest margin.

Subjects and keywords

• Subject:
  • Banking
  • Commercial banks
  • Credit risk
  • Financial regulation and supervision
  • Financial services
  • Financial statements
  • Market risk
  • Public financial management (PFM)
  • Short term interest rates
  • Yield curve
• Keywords:
  • banks
  • Credit risk
  • Financial statements
  • Global
  • interest margin
  • interest rate risk
  • interest rates
  • macroprudential
  • Market risk
  • maturity mismatch
  • maturity transformation
  • microprudential
  • net interest margin
  • net position
  • profitability
  • risk exposure
  • Short term interest rates
  • WP
  • Yield curve

Policy implications and analysis highlights

• The paper assesses trade-offs between profitability and risk stemming from maturity transformation:
  • Maturity transformation can enhance net interest margin (reward).
  • Excessive maturity transformation raises interest rate risk exposure and can reduce net interest margin (risk).
• The relaxation of a binding prudential limit on maturity mismatch (as occurred in Italy until mid-2000s) is analysed for its implications on banks’ margins and risk exposures.

IMF Working Paper — Pierluigi Bologna, "Banks’ Maturity Transformation: Risk, Reward, and Policy", Working Paper No. 2018/045.

Content in this bundle

• Banks’ Maturity Transformation: Risk, Reward, and Policy, WP/18/45, March 2018
  • Banks’ Maturity Transformation: Risk, Reward, and Policy, WP/18/45, March 2018 (Markdown version)
  • Banks’ Maturity Transformation: Risk, Reward, and Policy, WP/18/45, March 2018 (PDF)