Finance

Maturity (psychological)

Gene

Financial economics

Physics

Profitability index

Net interest income

Developmental psychology

Business

Psychology

Economics

Interest rate

Political science

Business administration

Chemistry

Return on assets

Equity (law)

Transformation (genetics)

Franchise

Interest rate risk

Biochemistry

Monetary economics

Net interest margin

Term (time)

Quantum mechanics

The Journal of Finance

ABSTRACT We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.

Banking on Deposits: Maturity Transformation without Interest Rate Risk