Low term premia push bank maturity gap to 5.7 years

Historical Call Report data reveals that the maturity gap of U.S. commercial banks expanded from a trough of 1.6 years in 1986 to a peak of 5.7 years in late 2022.

Authors Thomas Mertens, Pascal Paul, and Andres Schneider demonstrate that this trend tracks declining short-term interest rates and term premia.

To cover operating costs averaging 2.5 percent of total assets, banks face an implicit profitability constraint.

When compressed yields reduce baseline interest margins, institutions extend asset duration toward higher-yielding long-term bonds to meet earnings targets.

Cross-sectional evidence confirms that banks with lower return on assets subsequently increase asset maturities, primarily within their securities portfolios, to rebuild net interest margins.

Quantitative easing aims to remove duration risk from the private sector by replacing long-term securities with zero-maturity central bank reserves.

However, the model shows that compressing term premia below a critical threshold forces banks to take on more duration risk to stay solvent.

Quantitative analysis indicates that falling short-term rates account for 55 percent of the four-year maturity gap rise, while term premium compression drives the remaining 45 percent.

This duration loading leaves banks vulnerable to self-fulfilling deposit runs if interest rates suddenly surge.