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Rollover Risk and the Maturity Transformation Function of Banks

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Listed:
  • Teodora Paligorova
  • João Santos

Abstract

This paper shows that banks that rely heavily on short-term funding engage less in maturity transformation in an attempt to decrease their exposure to rollover risk. These banks shorten both the maturity of their portfolio of loans as well as the maturity of newly issued loans. We find that the loan yield curve becomes steeper with banks’ increasing use of short-term funding. The loan maturity shortening is driven by banks and affects borrowers’ financing choices - they turn to the bond market for long-term funding. To the extent that borrowers do not manage to compensate for the undesirable shortening of loan maturities by going to the bond market, they may become more exposed to rollover risk due to banks. This potential synchronization of banks’ and borrowers’ rollover risk can be a source of financial instability once short-term funding suddenly disappears.

Suggested Citation

  • Teodora Paligorova & João Santos, 2014. "Rollover Risk and the Maturity Transformation Function of Banks," Staff Working Papers 14-8, Bank of Canada.
    • Handle: RePEc:bca:bocawp:14-8
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    References listed on IDEAS

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    Cited by:

    1. Ippolito, Filippo & Ozdagli, Ali K. & Perez-Orive, Ander, 2018. "The transmission of monetary policy through bank lending: The floating rate channel," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 49-71.
    2. World Bank Group, 2017. "Kenya Economic Update, December 2017," World Bank Publications - Reports 29033, The World Bank Group.

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    More about this item

    Keywords

    Financial stability;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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