Reaching for Duration

Thomas Mertens, Pascal Paul and Andrés Schneider
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Andrés Schneider: https://www.federalreserve.gov/econres/andres-schneider.htm

No 2026-16, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Using historical data on U.S. commercial bank balance sheets, we show that banks’ maturity mismatch has more than tripled since the mid-1980s, moving in close lockstep with declining interest rates and term premia. We rationalize these trends in a model of bank portfolio choice in which banks must cover operating costs out of current earnings. When term premia or short-term rates decline, banks extend the duration of their assets to remain profitable. This “reaching for duration” effect is convex in the degree of term premium compression. The resulting maturity mismatch renders banks increasingly vulnerable to self-fulfilling runs by uninsured depositors. Consistent with the model, less profitable banks subsequently raise their asset maturities, particularly in periods of low term premia and large Federal Reserve asset holdings. Quantitative easing, designed to remove duration risk from the private sector, may thus paradoxically concentrate it on bank balance sheets and undermine financial stability.

Keywords: maturity mismatch; term premium; quantitative easing; financial stability; bank runs; deposit franchise (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G1 G11 G21 (search for similar items in EconPapers)
Pages: 105
Date: 2026-08-10
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DOI: 10.24148/wp2026-16

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