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Long-term debt contracts transfer aggregate risk from borrowing firms to lending banks. When aggregate shocks increase the future default probability of firms, banks are not compensated for the default risk of existing contracts. If banks are highly leveraged, this can lead to financial instability with severe repercussions in the real economy. To study this mechanism quantitatively, we build a macroeconomic model of financial intermediation with long-term defaultable loan contracts and calibrate it to match aggregate firm and bank exposure to business cycle risks. Our model exhibits banking crises that closely resemble observed crisis episodes. We find that such crises do not arise in an economy with short-term debt. Our results on the role of long-term debt completely reverse if financial regulation is implemented to increase banks' risk bearing capacity. The financial sector is then well equipped to take on the aggregate risk, such that long-term lending stabilizes the business cycle by providing insurance to the corporate sector.

This paper analyses theperformance ofmaturity transformation strategiesduring a period of high and low interest rates. Based on German government bond yieldsfrom September 1972 to May 2019,we construct a rolling window of bond ladders where long-term assets are financed by short-term liabilities. Risk and return increase significantly with maturity gaps for both sample periods. During theperiod of low interest rates,dominant strategies can be observed for short-term and medium-term gaps.With respect to different financial reporting standards,weaddress maturity transformation results froman earnings-based perspective as well as froma market value-based perspective.

The aim of this paper is twofold: first, to study the determinants of banks' net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch; second, to analyse the implications for banks of the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until the mid-2000s. The results show that maturity transformation is an important driver of the net interest margin, as higher maturity transformation is typically associated with higher net interest margin. However, there is a limit to this positive relationship as "excessive" maturity transformation - even without leading to systemic vulnerabilities - has some undesirable implications in terms of higher exposure to interest rate risk and lower net interest margin.

This paper investigates interest rate risk exposures of listed euro area banks which fall under the Single Supervisory Mechanism (SSM). We analyze the period 2005 to 2014, as it includes times of very low interest rates in which banks may have pursued a more risky maturity transformation strategy. First, we use the Bayesian DCC M-GARCH model to assess banks' stock price sensitivities to principal components of changes in the yield curve describing shifts in its level, slope and curvature. Second, we investigate how these sensitivities vary depending on bank-level characteristics (e.g., balance sheet composition, reliance on interest income). Our findings reveal that, on average, banks benefit from positive level shifts and steepening yield curves. Curvature changes affect banks' share prices as well, particularly in times of crises. Further, these sensitivities change in time and depend heavily on the bank's business model and balance sheet composition. Our analysis reveals that banks with larger balance sheets, higher capital ratios, higher parts of customer loans and lower parts of deposits are particularly sensitive to interest rate movements.

This essay discusses the economic case for regulating shadow banking. It asks three questions. First, what is shadow banking? Second, why shadow banking should be regulated. Third, how to regulate shadow banking efficiently. Although shadow banking is, like banking, based on maturity transformation, no definition of shadow banking is ideal for regulatory purposes. Focusing on systemic risk, we take an instrument-based approach and define banking as leveraging on collateral to support liquidity promises. For regulation to be effective, however, this definition must be combined with other entity-based approaches. The economic rationale for regulating shadow banking is the negative externality stemming from systemic risk. Because uncertainty makes any measure of systemic risk imprecise, quantity regulation is preferable to a Pigovian tax to cope with this externality. Regulation should limit the leverage of shadow banking by imposing a minimum haircut regulation on the assets being used as collateral for funding. In theory, minimum haircuts regulation is an efficient way to constrain shadow banking. However, the practical difficulties of monitoring leverage at the assets level call for an indirect regulation of institutional leverage, too. This is effectively achieved through the regulation of bank leverage, which increases the cost of liquidity puts to shadow banking. Such risk-insensitive restrictions, however, undermine the efficiency of banking, whether official or shadow.

This paper studies a banking model of maturity transformation in which regulatory arbitrage induces the coexistence of regulated commercial banks and unregulated shadow banks. We derive three main results: First, the relative size of the shadow banking sector determines the stability of the financial system. If the shadow banking sector is small relative to the capacity of secondary markets for shadow banks' assets, shadow banking is stable. In turn, if the sector grows too large, it becomes fragile: an additional equilibrium emerges that is characterized by a panic-based run in the shadow banking sector. Second, if regulated commercial banks themselves operate shadow banks, a larger shadow banking sector is sustainable. However, once the threat of a crisis reappears, a crisis in the shadow banking sector spreads to the commercial banking sector. Third, in the presence of regulatory arbitrage, a safety net for banks may fail to prevent a banking crisis. Moreover, the safety net may be tested and may eventually become costly for the regulator. JEL Classification: G21, G23, G28

This paper develops a DSGE model where banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. Within an RBC framework, we show that maturity transformation in the banking sector dampens the consumption and investment response to a technology shock. Our model also implies that the average deposit rate is less persistent than the average long-term loan rate, which we show is in line with corporate interest rate data in the US. JEL Classification: E32, E44, E22, G21

This paper develops a DSGE model where banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. Within an RBC framework, we show that maturity transformation in the banking sector dampens the consumption and investment response to a technology shock. Our model also implies that the average deposit rate is less persistent than the average long-term loan rate, which we show is in line with corporate interest rate data in the US.

This paper explores the extent to which interest risk exposure is priced in bank margins. Our contribution to the literature is twofold: First, we present an extended model of Ho and Saunders (1981) that explicitly captures interest rate risk and returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit rates, but reduce these charges when they expect returns from maturity transformation. Second, using a comprehensive dataset covering the German universal banks between 2000 and 2009, we test the model-implied hypotheses not only for the commonly investigated net interest income, but additionally for interest income and expenses separately. Controlling for earnings from bank-individual maturity transformation strategies, we find all banks to charge additional fees for macroeconomic interest volatility exposure. Microeconomic on-balance interest risk exposure from maturity transformation, however, only affects the smaller savings and cooperative banks, but not private commercial banks. Returns are only priced in income margins.

The authors argue that attempts to raise a significant percentage of gross domestic product in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. They point out that, although the side effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the crisis. Accordingly, such taxes likely deliver both less revenue and less efficiency benefits than have sometimes been claimed by some. On the other hand, they may be less damaging than feared by others. Copyright 2011, Oxford University Press.

This paper describes the first thorough analysis of the interest risk of German banks on an individual bank level. We develop a new method that is based on time series of accountingbased data to quantify the interest risk of banks and apply it to analyze the German banking system. We find evidence that our model yields a significantly better fit of banks' internally quantified interest rate risk than a standard approach that relies on one-point-in-time data, and that the interest rate risk differs between banks of different size and banking group. Additionally, we find structural differences between trading book and non-trading book institutions.

The increasing incidence and intensity of crises in the international financial markets during the 1990s have given new impetus to the debate on reform of the international financial system. Much of the discussion focuses on the idea of an international lender of last resort which could provide liquidity to ensure the stability of the international financial system. This paper responds to the question of whether an international lender of last resort is necessary by presenting both the differences and the similarities between a domestic financial market and an international one. This comparison will show that in regard to those aspects which justify the existence of a lender of last resort at the national level, the two types of financial markets are no different: If commercial banks are engaging in maturity and liquidity transformation, then the existence of a lender of last resort is a prerequisite to stable and crisis-free development of financial markets. Both the recent financial crises, and the developments which can be observed in the banking sectors of Latin America and Eastern Europe, provide empirical evidence for this thesis. In these regions, banking sectors are emerging which are increasingly dominated by foreign banks, and thus have indirect access to an international lender of last resort. At the same time, there is an increasing tendency within emerging markets to introduce regulations which limit the extent to which transformation is performed in financial markets, and thus to limit as far as possible the risks which make an international lender of last resort necessary.