The Interest Rate Brake on Maturity Transformation

David Howden and Amadeus Gabriel

MPRA Paper from University Library of Munich, Germany

Abstract: Must banks match asset and liability maturities, as William Barnett and Walter E. Block (2009, 2011) as well as Ivan Jankovic (2011) surmise? While we agree with these authors that issuances of fiduciary media breed financial instability, we disagree that maturity transformation represents such a case. Maturity transformation — otherwise known as borrowing short-term and lending long-term — guided by several base legal principles, does not result in the issuance of fiduciary media. Most notable among these principles is that any credit issued must be funded by borrowing of a positive duration, i.e., not via a demand deposit. We demonstrate that two factors instigate larger degrees of maturity transformation than would otherwise be the case, breeding potential instability: a continual increase in the credit supply and the provision of a lender of last resort. We also show that the interest rate is a natural stabilizing brake on the over-issuance of longer-dated credit against short-term financing.

Keywords: bank assets; deposits; loans; maturity mismatch (search for similar items in EconPapers)
JEL-codes: G2 G20 K22 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

Published in Journal of Economic Issues 49.4(2015): pp. 1100-1111

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Related works:
Journal Article: The Interest Rate Brake on Maturity Transformation (2015)
Working Paper: The Interest Rate Brake on Maturity Transformation (2015)
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