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Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries

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  • Morgan, George Emir
  • Smith, Stephen D

Abstract

The maturity mismatch problem faced by a risk-averse financial intermediary is modeled by dynamic programming with both fixed-rate, short-term, and variable-rate, long-term lending when the major source of risk in volves uncertain interest rates. The strategy of matching the maturit y of assets and liabilities is not generally optimum or even risk min imizing. This is due to the "built-in" hedge which the intermediary may have as a result of rolling over short-term loans while continui ng to finance long-term loans. Intertemporal dependencies in loan dem and or funding costs affect the optimal degree of maturity mismatchin g. Copyright 1987 by American Finance Association.

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  • Morgan, George Emir & Smith, Stephen D, 1987. "Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries," Journal of Finance, American Finance Association, vol. 42(4), pages 1023-1034, September.
    • Handle: RePEc:bla:jfinan:v:42:y:1987:i:4:p:1023-34
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    Cited by:

    1. Patrick McGuire & Goetz von Peter, 2012. "The Dollar Shortage in Global Banking and the International Policy Response," International Finance, Wiley Blackwell, vol. 15(2), pages 155-178, June.
    2. M. Cary Collins & Van Son Lai & James E. McNulty, 1997. "Thrifty Viability and Traditional Mortgage Lending: A Simultaneous Equations Analysis of the Risk-Return Trade-Off," Journal of Real Estate Research, American Real Estate Society, vol. 13(2), pages 155-176.
    3. Hunter, William C. & Smith, Stephen D., 2002. "Risk management in the global economy: A review essay," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 205-221, March.
    4. HuiChen Chiang, 2007. "Financial intermediary's choice of borrowing," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 251-260.
    5. Sotiris K. Staikouras, 2006. "Financial Intermediaries and Interest Rate Risk: II," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 15(5), pages 225-272, December.
    6. Andrew T. Young & Travis Wiseman & Thomas L. Hogan, 2014. "Changing Perceptions of Maturity Mismatch in the U.S. Banking System: Evidence from Equity Markets," Southern Economic Journal, John Wiley & Sons, vol. 81(1), pages 193-210, July.
    7. Raymond Chaudron, 2016. "Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks," DNB Working Papers 526, Netherlands Central Bank, Research Department.

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