PRACE NAUKOWE UNIWERSYTETU EKONOMICZNEGO WE WROCŁAWIU RESEARCH PAPERS OF WROCLAW UNIVERSITY OF ECONOMICS AND BUSINESS 2020, vol. 64, nr 9 ISSN 1899-3192 e-ISSN 2392-0041 Ivanna Chaikovska Jagiellonian University in Krakow e-mail: [email protected], [email protected] ORCID: 0000-0002-9425-2852 THE MISMATCH BETWEEN THE MATURITY STRUCTURE OF BANK ASSETS AND LIABILITIES IN POLISH LISTED BANKS AND THE POLISH BANKING SECTOR: AN EMPIRICAL STUDY DOI: 10.15611/pn.2020.9.02 JEL Classification: G21; G28; G32; K22. © 2020 Ivanna Chaikovska This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/4.0/ Quote as: Chaikovska, I. (2020). The mismatch between the maturity structure of bank assets and liabilities in Polish listed banks and the Polish banking sector: An empirical study. Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, 64(9). Abstract: The purpose of the article is to identify the problem of the mismatch between the maturity structure of assets and liabilities of the Polish banking sector and Polish listed banks. The article analyzes the maturity balance sheet structure of the Polish banking sector in 2010 and 2019 and Polish listed banks in 2019. The results of this analysis indicate a significant mismatch in the maturity structure of assets and liabilities of Polish banks and the need for a significant reconstruction of the structure of liabilities in the direction of their extension. Furthermore, the results of the analysis identify the most and the least secure Polish listed banks in terms of mismatches in the maturity balance sheet structure, as well as banks with opposite trends in the maturity structure compared to the Polish banking sector. Keywords: banks, maturity structure of assets and liabilities, Polish listed banks, Polish ban- king sector, liquidity, balance sheet. 1. Introduction The specificity of banks’ activity means that the dominant source of their financing is foreign capital, located in the balance sheet on the liabilities side. Furthermore, most liabilities are usually short-term or payable on demand (e.g. deposits), while assets (e.g. loans) are usually long-term and payable on maturity. Concerning the above, there is a risk of a mismatch between the maturity structure of bank assets The mismatch between the maturity structure of bank assets and liabilities in Polish... 17 and liabilities, which may result in the loss of liquidity and a threat to the security of the individual banks and the entire banking sector. Furthermore, the purpose of the article was to identify the problem of the mismatch between the maturity structure of the assets and liabilities of the Polish banking sector and Polish listed banks. The article analyses the maturity balance sheet structure of the Polish banking sector in 2010 and 2019 and Polish listed banks in 2019. The analysis includes twelve banks listed on the Warsaw Stock Exchange, namely PKO Bank (Powszechna Kasa Oszczędności Bank Polski), Santander Bank, Pekao Bank (Bank Polska Kasa Opieki), mBank, ING Bank, BNP Paribas Bank, Bank Millennium, Alior Bank, Getin Noble Bank, Bank Handlowy w Warszawie, Bank Ochrony Środowiska and Idea Bank. The calculations used the financial data provided by the Orbis Bank Focus database, the National Bank of Poland and the consolidated financial statements of Polish listed banks. The above analysis will also be the basis for identifying mismatches between the maturity structure of bank assets and the liabilities of the Polish banking sector and Polish listed banks, identifying the most and least secure Polish banks in this context, and identifying banks with reverse trends in the maturity structure compared to the Polish banking sector. To achieve the set purpose, the methods of comparing documents, consolidated financial statements and reports of the National Central Bank were used (especially in the section on the characteristics of the maturity structure of bank assets and liabilities) and methods of descriptive statistics (in the empirical part of the article). In reference to the above, in this paper a research hypothesis was formulated, namely a significant mismatch in the maturity structure of assets and liabilities may leads to a reduction in a bank’s safety level by increasing the liquidity risk in the bank. 2. The maturity structure of bank assets and liabilities: a theoretical approach The banking industry, academia and supervisors place a relatively greater emphasis on capital requirements than on liquidity and funding, reflecting the general view that a solvent bank will be liquid (Shi and Liu, 2016). However, the global financial crisis of 2009-2011 confirmed that a lack of liquidity might become one of the first causes of crisis phenomena, and lead to bank insolvency and bankruptcy. In reference to the above, in post-crisis years in order to reduce the liquidity risk the Basel Committee has implemented the minimum liquid requirements for banks. In accordance with the regulatory framework of Basel III, as a liquidity measure a maturity mismatch could be applied, by using the maturity ladder (contractual periods). The risk of mismatching between the maturity structure of bank assets and liabilities may result in loss of liquidity (Galletta and Mazzù, 2019). As noted in the literature, each asset and each liability contributes to the liquidity position of the bank (Bai, Krishnamurthy, and Weymuller, 2014, p. 3). 18 Ivanna Chaikovska Banks face naturally a liquidity risk relative to their fundamental role in maturity transformation, which means turning illiquid bank assets into short-term liquid bank liabilities (Passmore and Temesvary, 2020). In fact, banks’ investment horizon is in general longer than the investment horizon of the banks’ creditors. The illiquidity of bank assets coupled with the liquidity promised through bank liabilities leaves banks vulnerable to runs and liquidity crises (Virgilio, 2020, p. 3). In recent years, market evolution and financial innovation have modified banks’ practices and, consequently, the nature of liquidity risk. The main consequence of these various modifications is the increased connection between banking activities and markets. Hence, liquidity has become an important contagion channel for systemic risk. In other words, a loss of the bank’s liquidity in a short-term period may lead to its insolvency, followed by bankruptcy or systemic government intervention. This may also contribute to security disruptions at the level of an individual bank or the entire banking sector. In relation to this, it becomes necessary to constantly monitor the maturity balance sheet structure at the level of individual banks as well as the entire banking sector. The identification of mismatches will allow taking actions aimed at reducing the scale of mismatch between assets and liabilities, in order to avoid a situation in which long-term illiquid assets are financed by short-term unstable sources of financing. At the same time, the need for monitoring and overnighting of maturity mismatch has been acknowledged as a way to reduce rollover risk and preserve financial security and stability (Bologna, 2018, p. 5). The specificity of banks’ activity, namely issuing short-term liabilities (deposits) in exchange for longer-term assets, generate a maturity mismatch between the assets and the liabilities of banks (Ferrero, Nobili, and Sene, 2018, p. 2). In reference to this, it becomes essential to compare assets and liabilities by their maturity dates in order to assess the bank’s balance sheet structure and identify its mismatches. The estimation of potential mismatches is based on the method of monitoring the upcoming maturity ladder. For this purpose the components of on-balance and off-balance sheet are broken down by maturity into specific groups (Bai, Krishnamurthy, and Weymuller, 2014, p. 1). Furthermore, the division into groups depends on the decisions of individual banks and is varied among individual banks. Usually the balance sheet items are divided into the following contractual periods: • a vista (without a specified date); • less than 1 month; • from 1 to 3 months; • from 3 months to 1 year; • from 1 to 5 years; • over 5 years. The mismatch between the maturity structure of bank assets and liabilities in Polish... 19 The matching of the abovementioned periods of balance sheet items plays a significant role at the level of an individual bank as well as the entire banking sector. In relation to this, the author analysed the maturity structure of the balance sheets at the level of the entire banking sector in order to identify mismatches, assess the risks associated with them and take actions aimed at changing the balance structure and avoiding crises at macroeconomic level. 3. Analysis of the maturity structure of assets and liabilities of the Polish banking sector: identification of mismatches In order to assess the situation of the Polish banking sector, an analysis was conducted regarding the maturity structure of assets and liabilities of the Polish banking sector. The results of this analysis are presented in Figure 1. 1 6% 4% 0,9 8% 10% 28% 32% 0,8 10% 15% 0,7 8% 11% 0,6 32% 20% 24% 0,5 11% 0,4 12% 39% 10% 0,3 3% 3% 0,2 13% 37% 17% 11% 0,1 13% 12% 10% 0 30.06.2019 Assets 30.06.2019 Liabilities 31.12.2010 Assets 31.12.2010 Liabilities Without a specific date Equity capitals = <1 month > 1 month = <3 months > 3 months = <1 year > 1 year = <5 years > 5 years Fig. 1. The maturity structure of assets and liabilities of the Polish banking sector in 2010 and 2019, % Source: own elaboration based on data from the (National Bank of Poland, n.d.). The results of the analysis of the maturity balance sheet structure of the Polish banking sector in 2010 and 2019 indicate significant changes occurring in the balance sheet structure of Polish banks.