BANKING ON DEPOSITS: MATURITY TRANSFORMATION WITHOUT INTEREST RATE RISK
Overview
Paper Summary
This paper argues that maturity transformation, traditionally seen as exposing banks to interest rate risk, actually reduces it thanks to the deposit franchise. Banks' market power over deposits lets them offer rates insensitive to market changes, while operational costs are also largely fixed. This creates a natural hedge for long-term lending, stabilizing profits despite interest rate fluctuations.
Explain Like I'm Five
Scientists found that banks are surprisingly safe even when they use short-term savings for long-term loans. This is because banks don't have to change the interest they pay on deposits very often, which helps them make steady profits.
Possible Conflicts of Interest
None identified
Identified Limitations
Rating Explanation
This paper offers a novel perspective on the relationship between maturity transformation and interest rate risk in banks. The empirical analysis is comprehensive and well-executed. However, some limitations regarding causality and model assumptions prevent a perfect score.
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