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The Impact of Interest Rate Risk on Bank Lending

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

No 2017-04, Working Papers from Swiss National Bank

Abstract: In this paper, we empirically analyze the transmission of realized interest rate risk - the gain or loss in a bank's economic capital caused by 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 two main results. First, the impact of an interest rate shock on bank lending significantly depends on the individual exposure to interest rate risk. The higher a bank's exposure to interest rate risk, the higher the impact of an interest rate shock on its lending. Our estimates indicate that a year after a permanent 1 percentage point upward shock in nominal interest rates, the average bank in 2013Q3 would, ceteris paribus, reduce its cumulative loan growth by approximately 300 basis points. An estimated 12.5% of the impact would result from realized interest rate risk weakening the bank's economic capital. Second, bank lending appears 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)
New Economics Papers: this item is included in nep-ban, nep-mac, nep-mon and nep-rmg
Date: 2017
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Related works:
Working Paper: The Impact of Interest Rate Risk on Bank Lending (2015) Downloads
Working Paper: The Impact of Interest Rate Risk on Bank Lending (2015) Downloads
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