Banks’ maturity mismatch, financial stability, and macroeconomic dynamics

Abstract

The average maturity of total bank assets has been rising sharply following the 4-trillion-yuan stimulus package proposed by the Chinese government in 2009. This paper investigates the macroeconomic implications of maturity mismatch problem using the Chinese data over the period 2007Q1–2019Q4. We extend the New-Keynesian DSGE framework from several dimensions: (i) financial frictions between banks and households; (ii) multi-period loan contracts; (iii) dynamic differential reserve requirement as a macroprudential regulation tool. After estimating the model with Chinese data, the simulation results indicate that the sluggish adjustment of financing cost caused by maturity mismatch will attenuate the real sector fluctuation, however, the feedback effects will amplify the responses of the banking sector. Meanwhile, a severe maturity mismatch will dampen the effect of the required reserve rate as a tool to keep financial stability when confronted with productivity shock.