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 C.E.P.R. Discussion Papers

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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