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

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  • Augustin Landier
  • David Sraer
  • David Thesmar

Abstract

We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18857.

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Date of creation: Feb 2013
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Handle: RePEc:nbr:nberwo:18857

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  1. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(1), pages 121-41, February.
  2. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(3), pages 418-437, July.
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  4. Chava, Sudheer & Purnanandam, Amiyatosh, 2007. "Determinants of the floating-to-fixed rate debt structure of firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 85(3), pages 755-786, September.
  5. Murillo Campello, 2002. "Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2773-2805, December.
  6. Guay, Wayne & Kothari, S. P, 2003. "How much do firms hedge with derivatives?," Journal of Financial Economics, Elsevier, Elsevier, vol. 70(3), pages 423-461, December.
  7. Purnanandam, Amiyatosh, 2007. "Interest rate derivatives at commercial banks: An empirical investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1769-1808, September.
  8. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(4), pages 436-457, October.
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Cited by:
  1. Ruprecht, Benedikt & Entrop, Oliver & Kick, Thomas & Wilkens, Marco, 2013. "Market Timing, Maturity Mismatch, and Risk Management: Evidence from the Banking Industry," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79733, Verein für Socialpolitik / German Economic Association.
  2. Ippolito, Filippo & Ozdagli, Ali K. & Perez, Ander, 2013. "Is bank debt special for the transmission of monetary policy? Evidence from the stock market," Working Papers, Federal Reserve Bank of Boston 13-17, Federal Reserve Bank of Boston.
  3. Filippo Ippolito & Ali K. Ozdagli & Ander Pérez Orive, 2013. "Is bank debt special for the transmission of monetary policy? Evidence from the stock market," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1384, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Jerome Creel & Paul Hubert & Mathilde Viennot, 2013. "Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies," Working papers, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project wpaper34, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  5. Filippo Ippolito & Ali K. Ozdagli & Ander Perez, 2013. "Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market," Working Papers 721, Barcelona Graduate School of Economics.
  6. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.

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