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The Interest Rate Brake on Maturity Transformation

Author

Listed:
  • David Howden
  • Amadeus Gabriel

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.

Suggested Citation

  • David Howden & Amadeus Gabriel, 2015. "The Interest Rate Brake on Maturity Transformation," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(4), pages 1100-1111, October.
    • Handle: RePEc:mes:jeciss:v:49:y:2015:i:4:p:1100-1111
    DOI: 10.1080/00213624.2015.1105046
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    Cited by:

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    2. Philipp Bagus & David Howden & Jesús Huerta de Soto Ballester, 2018. "Entrepreneurial Error Does Not Equal Market Failure," Journal of Business Ethics, Springer, vol. 149(2), pages 433-441, May.

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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