1. Changing Perceptions of Maturity Mismatch in the US Banking System: Evidence from Equity Markets (a.k.a., “Recent Developments in the Maturity Structure of Bank Assets and Liabilities”) Andrew T. Young College of Business and Economics West Virginia University Morgantown, WV 26506 Andrew.Young@mail.wvu.edu Travis Wiseman College of Business and Economics West Virginia University Morgantown, WV 26506 Travis.Wiseman@mail.wvu.edu Thomas L. Hogan Department of Economics George Mason University Fairfax, VA 22030 thogan1@gmu.edu April 30 th, 2010 Prepared for presentation at the Midwest Macroeconomics Meetings.

2. Motivation In decade and a half leading up to the financial market crisis... 1.bank assets grew at a roughly constant rate; 2.mortgages/MBSs became an increasingly large component of bank assets; 3.cash assets became an increasingly small component of assets; 4.leverage decreased.

3. Motivation

4. In decade and a half leading up to the financial market crisis... 1.bank assets grew at a roughly constant rate; 2.mortgages/MBSs became an increasingly large component of bank assets; 3.cash assets became an increasingly small component of assets; 4.leverage decreased.

5. Motivation

6. In decade and a half leading up to the financial market crisis... 1.bank assets grew at a roughly constant rate; 2.mortgages/MBSs became an increasingly large component of bank assets; 3.cash assets became an increasingly small component of assets; 4.leverage decreased.

7. Motivation

8. Banks were not adjusting their balance sheets along the extensive margin as assets grew. Assets = Liabilities + Equity ↑ x% ↑ y% > x% The composition of bank assets was changing (adjustment along an intensive margin). For the banking system, underlying assets were becoming longer-term on average.

9. Effective Maturity can be different than stated maturity time to re-pricing e.g., banks make 30 year home loans expecting to sell the mortgages to Fannie or Freddie within the year; … they also attract 24 month CDs that they largely expect to come due 24 months from now.

10. Motivation GSEs standing ready to purchase and/or secure mortgages and MBS. Individual banks all view the effective maturities of real estate loans as less than state maturities. Banking system of a whole based increasingly on longer-term assets. What did market participants believe?

11. Empirical Methodology Flannery and James (1984). estimate effect of market interest rates on bank rates of return R t =  0 + β m R mt + β l R lt + e t, R t =the holding period return on commercial bank stocks over t; R mt =the holding period return on a general stock index over t; R lt =the holding period return on a constant maturity index of default risk-free bonds over t. β l larger (smaller) implies effective maturity of assets longer (shorter) relative to liabilities.

12. Data R t = weekly changes in the NASDAQ Bank Index; R mt = weekly changes in the S&P 500 Index (or NASDAQ composite); R lt = return on the 1-year, 7-year, or 10-year treasury security November 1990 through October 2009 rolling regressions of 201 observations each β l estimates for September 1992 through November 2007

13. Results

17. Data 27 largest, publicly-traded bank holding companies 1990-1996 1997-2009

18. Shaded entries: earlier period coefficient (a) statistically significantly different than zero and (b) greater than later period coefficient.

20. Why was Maturity Mismatch Perceived to be Smaller? Using Fed commercial bank balance sheet aggregate data, run the following regression. Using β lt time series from (1) NASDAQ Bank Index rolling regression; (2) median β lt from holding company regressions.

21. Shaded and red entries are where CIs do not overlap. Consumer loans increased (decreased) maturity mismatch in earlier (later) period. Evidence of the same for real estate loans but …

22. Consumer Loans as a Percent of Bank Assets

23. Conclusions During the 1990s, stock market participants began to view maturity mismatch as smaller on bank balance sheets. At the same time the banking system took on mortgages and MBSs as an increasing share of their balance sheets. Evidence that increases in mortgages/MBSs decreased the perception of maturity mismatch post mid-1990s. GSEs absorbed the associated interest rate risk.