Interest rate liberalization in China intensifies the exposure of commercial banks' interest rate risks and further increases the difficulty for commercial banks to effectively control interest rate risks, thus putting forward higher requirements for the normal operation and management of commercial banks. With the development of China's financial derivatives market, banking institutions begin to use basic interest rate derivatives to hedge interest rate risks. It is very important to give full play to the maturity transformation Function of commercial banks to enhance the ability of financial services to the real economy. Based on the semi annual unbalanced panel data of 37 listed banks in A-share stock markets from 2006 to 2020, this paper empirically tests the impact of the use of off balance sheet interest rate derivatives on the Maturity Transformation Function of banks in the case of interest rate fluctuations. The empirical results show that: (1) the use of interest rate derivatives helps to weaken the negative impact of interest rate fluctuations on the Maturity Transformation Function of banks. (2) The analysis of the mechanism shows that the use of interest rate derivatives improves the stability of the bank's asset side term structure and liability side term structure, so as to support the effective play of the bank's financial intermediary role. (3) Further analysis shows that the of interest rate derivatives significantly reduces the volatility of bank earnings. This study makes it clear that the use of interest rate derivatives has a positive impact on the commercial banks, which provides evidence for the further development of interest rate derivatives market in China.

This paper develops a model of private debt financing under inefficient financial intermediation. It suggests a mechanism that can generate the following sequence of events observed in the recent Asian crisis: A period of relatively low capital flow despite a steady improvement in economic fundamentals (capital inflow inertia), followed by a fast buildup of capital inflow, and ended with a large capital outflow and domestic credit crunch. Unlike other models requiring large movements in fundamentals or asset prices to explain a financial crisis, this model can exhibit large credit/capital flow swings with moderate changes in the economic and market environment.

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid tranche containing the concentrated credit risk, private information rent and the “excess spread” that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the residual tranche is about 3%, which reflects the size of the “market determined capital” necessary to support the liquefaction. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non-guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit-lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy-remote without sacrificing a bank’s traditional role as a financial intermediary.

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid tranche containing the concentrated credit risk, private information rent and the “excess spread” that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the residual tranche is about 3%, which reflects the size of the “market determined capital” necessary to support the liquefaction. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non-guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit-lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy-remote without sacrificing a bank’s traditional role as a financial intermediary.