Banks' maturity transformation: risk, reward, and policy

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.