Banks’ Maturity Choices and the Transmission of Interest-Rat e Risk
Abstract:
I s tudy the role of financial intermediaries in the transmission of interest-r ate risk. I develop a quantitative model where banks can invest in assets o f different durations and choose optimally their exposure to interest-rate fluctuations. I embed this portfolio problem in a heterogeneous-banks frame work with financial frictions and endogenous default. The model predicts th at in periods of loose monetary policy banks face weaker financial constrai nts. As a result, they become more tolerant of interest-rate risk and inves t more extensively in long-duration assets. However, when the economy under goes a sudden monetary tightening, this portfolio shift amplifies contracti ons in asset prices, credit, and output. I validate the model by showing th at it can reproduce aggregate and cross-sectional patterns related to banks ’ maturity mismatches, the level of the interest rate and leverage. A quant itative application to the 2022 monetary tightening shows that a lengthenin g of duration in periods of low interest rates gives rise to significant fi nancial amplification. A liquidity requirement that restricts banks’ invest ment in long-term assets makes the economy less vulnerable to sudden intere st-rate raises.
DTSTAMP:20260525T002813Z DTSTART:20250929T163000Z DTEND:20250929T180000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR