Working Paper: CEPR ID: DP11111
Authors: Anatoli Segura; Javier Suarez
Abstract: We quantify the gains from regulating maturity transformation in a model of banks which finance long-term assets with non-tradable debt. Banks choose the amount and maturity of their debt trading off investors' preference for short maturities with the risk of systemic crises. Pecuniary externalities make unregulated debt maturities inefficiently short. The calibration of the model to Eurozone banking data for 2006 yields that lengthening the average maturity of wholesale debt from its 2.8 months to 3.3 months would produce welfare gains with a present value of euro 105 billion, while the lengthening induced by the NSRF would be too drastic.
Keywords: liquidity risk; maturity regulation; pecuniary externalities; systemic crises
JEL Codes: G01; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excessive maturity transformation by banks (G21) | unregulated debt maturities that are inefficiently short (G19) |
| banks' choices of debt maturity (G21) | systemic crises (H12) |
| lengthening the average maturity of wholesale debt from 28 months to 33 months (G32) | welfare gains valued at €105 billion (D69) |
| current regulatory framework (NSFR) (G28) | excessive restrictions leading to net welfare losses (D61) |
| optimal regulation (L51) | allowing banks to issue longer-term debt while increasing overall debt issuance (G21) |