Empirical Analysis of the Efficiency of Maturity Transformationin the Czech Republic

Maturity transformation is a central strategy for a bank to generate additional earnings. As long as the short-term yields are lower than the long-term yields, the transformation of short-term liabilities into long-term assets makes sense. But does this work in every situation? This paper analyzes maturity transformation in the Czech Republic. After the description of the theoretical status quo in literature, the relevant data are analyzed. After that a historical Value at Risk analysis is modeled. This historical simulation offer the following results: First, it has to be stated that maturity transformation in the Czech Republic makes sense. Investing into positions with a high maturity/duration leads to an additional stable performance. Second, maturity transformation can be done best by defining special benchmarks and leveraging them. Adding the risk/return argumentation into the analysis confirms first that a higher duration leads to a better RORAC (Return on Risk adjusted Capital). Third, leveraging a long-term benchmark leads to an efficient RORAC. The 4 * 10Y – 3 * 1M benchmarks offers the best ex post RORAC, so it can be suggested as a useful benchmark for banks in the Czech Republic. All three hypothesis of the paper can be verified.