Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries

George Emir Morgan and Stephen D Smith

Journal of Finance, 1987, vol. 42, issue 4, 1023-34

Abstract: The maturity mismatch problem faced by a risk-averse financial intermediary is modeled by dynamic programming with both fixed-rate, short-term, and variable-rate, long-term lending when the major source of risk in volves uncertain interest rates. The strategy of matching the maturit y of assets and liabilities is not generally optimum or even risk min imizing. This is due to the "built-in" hedge which the intermediary may have as a result of rolling over short-term loans while continui ng to finance long-term loans. Intertemporal dependencies in loan dem and or funding costs affect the optimal degree of maturity mismatchin g. Copyright 1987 by American Finance Association.

Date: 1987
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