The Impact of Interest Rate Risk on Bank Lending

Toni Beutler, Robert Bichsel, Adrian Bruhin () and Jayson Danton

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: In this paper, we empirically analyze the transmission of realized interest rate risk – the gain or loss in bank economic capital due to movements in interest rates – to bank lending. We exploit a unique panel data set that contains supervisory information on the repricing maturity profiles of Swiss banks and provides us with an individual measure of interest rate risk exposure net of hedging. Our analysis yields three main results. First, our estimates indicate that a year after a permanent 1 percentage point upward shock in nominal interest rates, the average bank of 2013Q3 would ceteris paribus reduce its cumulative loan growth by approximately 170 basis points. An estimated 28% of this reduction would be the result of realized interest rate risk exposure weakening the bank’s economic capital. Second, due to the banks’ heterogeneity in interest rate risk exposure, the effect of the shock would differ across institutions and could be redistributive across regions. Finally, bank lending seems to be mainly driven by capital rather than liquidity, suggesting that a higher capitalized banking system can better shield its creditors from shocks in interest rates.

Keywords: Interest Rate Risk; Bank Lending; Monetary Policy Transmission (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G21 (search for similar items in EconPapers)
Pages: 46 pp.
Date: 2015-09
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The impact of interest rate risk on bank lending (2020)
Working Paper: The Impact of Interest Rate Risk on Bank Lending (2017)
Working Paper: The Impact of Interest Rate Risk on Bank Lending (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:15.09

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