A macro-financial perspective to analyse maturity mismatch and default

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The Basel Committee proposed the Net Stable Funding Ratio (NSFR) to curb excessive maturity mismatch within the banking sector. However, it remains to be ascertained as to what are the financial and real effects of the NSFR on bank credit quality, investment, and the pass-through of monetary policy. This paper develops a nominal dynamic general equilibrium model featuring bank maturity mismatch and the moral hazard due to costly monitoring. First, I show that a tightening of the NSFR to move loan maturity towards the long-run capital investment cycle would only increase real investment if it sufficiently improved bank credit quality. Then in the numerical example calibrated with the US data, I show that such tightening of the NSFR can indeed increase real investment and also reduce the aggregate fluctuation of the economy. In the steady states, a 10% tightening in the NSFR can decrease net charge-offs of non-performing loans by about 0.06 pp annually, despite squeezing bank interest margins. Moreover, the moral hazard stemming from banks’ unobserved monitoring efforts impairs the pass-through of monetary policy. However, a 10% tightening in the NSFR improves the pass-through of a 20-bp policy rate reduction by around 17% annually. Finally, the model simulates the stochastic dynamic equilibrium path to study the propagation of shocks, demonstrating that the NSFR complements monetary policy in reducing financial frictions.

Original languageEnglish
Article number106468
JournalJournal of Banking and Finance
DOIs
Publication statusAccepted/In press - 2022

Bibliographical note

Publisher Copyright:
© 2022 Elsevier B.V.

Keywords

  • Inside money
  • Maturity mismatch
  • Monetary and macro-prudential policy
  • Money creation
  • Net stable funding ratio
  • Price level

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