Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries
- Full Text PDF
- Author(s): GEORGE EMIR MORGAN, STEPHEN D. SMITH
- Published: Apr 30, 2012
- Pages: 1023-1034
- DOI: 10.1111/j.1540-6261.1987.tb03925.x
This paper considers the maturity intermediation and intertemporal lending decisions of risk‐averse financial intermediaries. In particular, the maturity mismatch problem and the fixed‐versus‐variable‐rate lending decision are modeled when the major source of risk involves uncertain future interest rates. The results imply that the strategy of matching the maturity of assets and liabilities is not generally optimal or even minimum risk. This is due primarily to the “built‐in” hedge that the intermediary has as a result of rolling over short‐term loans while continuing to finance long‐term loans. Intertemporal dependencies between loan demand and costs (or both) also have an effect on the optimal degree of maturity mismatching and provide one rationale for making loans at rates below current marginal cost.