Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy

David Thesmar, Augustin Landier and David Sraer

No 10300, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that banks' cash flow exposure to interest rate risk, or income gap, plays a crucial role in their lending behavior following monetary policy shocks. In a first step, we show that the sensitivity of bank profits to interest rates increases significantly with their income gap, even when banks use interest rate derivatives. In a second step, we show that the income gap also predicts the sensitivity of bank lending to interest rates, both for commercial & industrial loans and for mortgages. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile. We conclude that banks' exposure to interest rate risk is an important determinant of the bank-level intensity of the lending channel.

Keywords: Interest rate risk; Monetary policy; Bank lending (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-mac and nep-mon
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Related works:
Journal Article: Banks’ exposure to interest rate risk and the transmission of monetary policy (2021)
Working Paper: Banks' exposure to interest rate risk and the transmission of monetary policy (2016)
Working Paper: Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy (2013)
Working Paper: Banks' Exposure to Interest Rate Risk and The Transmission of Monetary Policy (2013)
Working Paper: Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy (2013)
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