Interdependence Between Assets and Liabilities in the Banking System: Changes in the Last Two Decades

Asset and liability management deals with the joint evaluation of assets and liabilities in a bank’s balance sheet; it is a traditional tool used by intermediaries to limit financial risks. Building on a measure of the extent of asset-liability management practices, which we name interdependence index, we show that the intensity of asset-liability linkages decreased between the beginning of the century and the onset of the COVID-19 pandemic for all three main classes of Italian banks (larger, smaller, and BCCs). The monetary policy operations introduced in the wake of the sovereign debt crisis, the 2012 reform of the tax treatment of bank bond yields and the protracted low interest rate environment meant there was less need for banks to closely link assets and liabilities in their balance sheets, thus fostering greater independence between investing and financing decisions.