How do banks respond to limits on maturity transformation?

The article examines how Italian banks responded to the 2006 repeal of a regulatory limit on maturity transformation, a constraint conceptually similar but stricter than the Basel III Net Stable Funding Ratio (NSFR). Using a difference-in-difference empirical approach with two definitions of treated and control groups, the study finds that banks previously constrained by the limit increased their long-term assets—particularly fixed-rate mortgage loans—and shortened the maturity of their liabilities, resulting in higher exposure to interest rate risk but no significant change in credit risk. Despite these balance sheet adjustments, bank profitability, measured by net interest margin, commission income, and return on equity, remained largely unaffected; however, there is evidence that banks leveraged deregulation to cross-sell asset management products alongside increased mortgage lending. These findings provide novel insights into the effects of regulatory easing on bank behavior and have implications for the calibration and potential time-varying use of the NSFR in macroprudential policy.