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Banking on Deposits: Maturity Transformation without Interest Rate Risk

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  • ITAMAR DRECHSLER
  • ALEXI SAVOV
  • PHILIPP SCHNABL

Abstract

We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.

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  • Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2021. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," Journal of Finance, American Finance Association, vol. 76(3), pages 1091-1143, June.
    • Handle: RePEc:bla:jfinan:v:76:y:2021:i:3:p:1091-1143
    DOI: 10.1111/jofi.13013
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