IDEAS home Printed from https://ideas.repec.org/p/fip/fedfwp/103631.html

Reaching for Duration

Author

Listed:

Abstract

Using historical data on U.S. commercial bank balance sheets, we show that banks’ maturity mismatch has more than tripled since the mid-1980s, moving in close lockstep with declining interest rates and term premia. We rationalize these trends in a model of bank portfolio choice in which banks must cover operating costs out of current earnings. When term premia or short-term rates decline, banks extend the duration of their assets to remain profitable. This “reaching for duration” effect is convex in the degree of term premium compression. The resulting maturity mismatch renders banks increasingly vulnerable to self-fulfilling runs by uninsured depositors. Consistent with the model, less profitable banks subsequently raise their asset maturities, particularly in periods of low term premia and large Federal Reserve asset holdings. Quantitative easing, designed to remove duration risk from the private sector, may thus paradoxically concentrate it on bank balance sheets and undermine financial stability.

Suggested Citation

  • Thomas M. Mertens & Pascal Paul & Andrés Schneider, 2026. "Reaching for Duration," Working Paper Series 2026-16, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:103631
    DOI: 10.24148/wp2026-16
    as

    Download full text from publisher

    File URL: https://www.frbsf.org/wp-content/uploads/wp2026-16.pdf
    File Function: PDF - view
    Download Restriction: no

    File URL: https://www.frbsf.org/research-and-insights/publications/working-papers/2026/08/reaching-for-duration/
    File Function: FRBSF - view
    Download Restriction: no

    File URL: https://libkey.io/10.24148/wp2026-16?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:103631. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Federal Reserve Bank of San Francisco Research Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbsfus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.