Working Paper

Banks, Maturity Transformation, and Monetary Policy

Abstract: Banks engage in maturity transformation and the term premium compensates them for bearing the associated duration risk. Consistent with this view, I show that banks’ net interest margins and term premia have comoved in the United States over the last decades. On monetary policy announcement days, banks’ stock prices fall in response to an increase in expected future short-term interest rates but rise if term premia increase. These effects are reflected in the response of banks’ net interest margins and amplified for institutions with a larger maturity mismatch. The results reveal that banks are not immune to interest rate risk.

Keywords: Banks; Maturity Transformation; Monetary Policy; Term Premium; Interest Rate Risk; Bank Profitability;

JEL Classification: E43; E44; E52; E58; G21; G32;

https://doi.org/10.24148/wp2020-07

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2020-02-28

Number: 2020-07