Banking on Deposits: Maturity Transformation without Interest Rate Risk

Itamar Drechsler, Alexi Savov and Philipp Schnabl

No 24582, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E43 E52 G21 G31 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-mac
Note: AP CF ME
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Citations: View citations in EconPapers (75)

Published as ITAMAR DRECHSLER & ALEXI SAVOV & PHILIPP SCHNABL, 2021. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," The Journal of Finance, vol 76(3), pages 1091-1143.

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Working Paper: Banking on Deposits: Maturity Transformation without Interest Rate Risk (2018)
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