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Fannie (and the other agencies) are the repackager.
Thanks, that's the bit I was missing — makes a lot of sense.
The average bank is funded with current accounts and shortish-duration savings products so cannot do this.
My money multiplier comment was more aimed at this. As I understand it — and this is a bit basic, I'll admit — is that if you throw out the Diamond-Dybvig model, there's no actual connection between their long term assets/mortgages and their short term liabilities/giving out deposits. So in theory we could have 30-year fixes, from new money, because the balances are unrelated, and a bank's ability to pay its deposits is more about their other services.
Or is that too simplistic?
slippers-
So in theory we could have 30-year fixes, from new money, because the balances are unrelated, and a bank's ability to pay its deposits is more about their other services.
I think this is where it's important to distinguish between the system as a whole and any individual bank. At the system-level, yes, duration mismatch does not exist because loans and deposits are always in balance (as they mutually create and destroy each other). However, any individual bank is still at risk of bank runs if all of the depositors decide to move their money to another bank.
NickCJ
Yes, but I don't totally understand how that relates to my comment. My point is that most banks would have an ALM mismatching problem if their assets were composed of 30-year fixed rate mortgages and their liabilities of 0-5 year deposits.