The Interest Rate Brake on Maturity Transformation

Howden, David; Gabriel, Amadeus

doi:10.1080/00213624.2015.1105046

Cited by 2 publications

(2 citation statements)

References 22 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Instead, our focus has always (and exclusively) been on maturity transformation in the unhampered market. Howden and Gabriel (2015) discuss the role of the interest rate in halting excessive maturity mismnatching in the unhampered economy. We do treat maturity transformation as a damaging economic force when fostered by governmental gurantees in Bagus and Howden (2010a), though that article only tangentially deals with the core issue of the present debate, namely, how ethical, legal or economically beneficial fractional-reserve banking is.…”

Section: Individual Error and Market Failurementioning

confidence: 99%

Entrepreneurial Error Does Not Equal Market Failure

2016

Self Cite

View full text Add to dashboard Cite

Barnett and Block (forthcoming) claim that Bagus and Howden (2012b) support indirectly the concept of market failure. In this paper we show that maturity mismatching in an unhampered market may imply entrepreneurial error but cannot be considered a market failure. We demonstrate why fractional-reserve banking leads to business cycles even if there is no central bank and why maturity mismatching does not per se lead to clusters of errors in a free market. Finally, we assure that, in contrast to the examples provided by Barnett and Block, maturity mismatching does not imply the creation of two incompatible contracts due to the fungible nature of money.

show abstract

Section: Individual Error and Market Failurementioning

confidence: 99%

Entrepreneurial Error Does Not Equal Market Failure

2016

Self Cite

View full text Add to dashboard Cite

show abstract

“…This article challenges the notion that banks will always try to fully arbitrage the yield curve in a free market by providing three counterarguments. First-to develop and expand on a point made by Howden and Gabriel (2015) on the role of the interest rate acting as a brake to maturity mismatching-arbitraging the yield curve is not a free lunch. Maturity mismatching increases a bank's financial risk, which in turn increases the cost of funding from depositors, investors, lenders, and shareholders.…”

mentioning

confidence: 99%

Arbitraging the Yield Curve: A Free Lunch?

Sánchez-Piñol Yulee

2024

Quarterly Journal of Austrian Economics

View full text Add to dashboard Cite

Banking crises can occur due to the mismatch of assets and liabilities. One of the main assumptions behind maturity mismatching is the incentive to arbitrage the yield curve in the market of loanable funds. Banks borrow at low rates and lend at higher rates to increase their profitability. The equilibrium in the evenly rotating economy (ERE) is a flat yield curve that equals the originary interest rate. This article challenges the notion that banks will always attempt to arbitrage the yield curve in a free market and explores how the price mechanism via interest rates acts as a brake to maturity mismatching. Maturity mismatching is a risky activity that is penalized through a higher cost of funding by different types of lenders. If this is true, it follows that a flat yield curve is not attainable in an uncertain world because financial intermediaries that engage in maturity mismatching will create a further spread between themselves and financial intermediaries that do not engage in this practice in the market of loanable funds. In addition, following Mises, the article discusses how economists should proceed with caution when applying equilibrium constructs, such as the ERE, which can disregard the function and properties, belonging to financial instruments such as debt and equity, of allocating risk in an uncertain world.

show abstract

The Interest Rate Brake on Maturity Transformation

Cited by 2 publications

References 22 publications

Entrepreneurial Error Does Not Equal Market Failure

Entrepreneurial Error Does Not Equal Market Failure

Arbitraging the Yield Curve: A Free Lunch?

Contact Info

Product

Resources

About