Is Maturity-Transformation Risk Priced into Bank Deposit Rates?

We use the term structure of bank CD rates to examine whether maturity-transformation risk is priced into the rates banks offer customers. We find that depositors pay a significant cost for the liquidity provided by bank deposits. This cost is strongly related to the amount of maturity-transformation risk that these deposit accounts create. The cost is also negatively correlated with the convenience premia in Treasury markets, which suggests that households do not view deposit liquidity and Treasury liquidity as perfect substitutes. The results have important implications about the role of deposit franchises and market power in banking markets.