Why do bank-dependent firms bear interest-rate risk?

Divya Kirti

Journal of Financial Intermediation, 2020, vol. 41, issue C

Abstract: I document that floating-rate loans from banks, particularly important for bank-dependent firms, drive most variation in firms’ exposure to interest rates. I argue that banks prefer to supply floating-rate loans, due to their finite ability to transform short-duration deposit liabilities into long duration assets. Three key findings support this argument: banks with more floating-rate liabilities make more floating-rate loans, hold more floating-rate securities, and quote lower prices for floating-rate loans. Intermediary funding structures therefore help determine what types of contracts non-financial firms use. Banks transmit rising policy rates to firms by contractually raising interest rates on existing loans, not just by reducing the supply of new loans.

Keywords: Interest-rate risk; Banking; Corporate finance; Financial intermediation (search for similar items in EconPapers)
JEL-codes: E44 G21 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (20)

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Related works:
Working Paper: Why Do Bank-Dependent Firms Bear Interest-Rate Risk? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:41:y:2020:i:c:s1042957319300312

DOI: 10.1016/j.jfi.2019.04.001

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