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Why Do Bank-Dependent Firms Bear Interest-Rate Risk?

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  • Divya Kirti

Abstract

I document that floating-rate loans from banks (particularly important for bank-dependent firms) drive most variation in firms' exposure to interest rates. I argue that banks lend to firms at floating rates because they themselves have floating-rate liabilities, supporting this with three key findings. Banks with more floating-rate liabilities, first, make more floating-rate loans, second, hold more floating-rate securities, and third, quote lower prices for floating-rate loans. My results establish an important link between intermediaries' funding structure and the types of contracts used by non-financial firms. They also highlight a role for banks in the balance-sheet channel of monetary policy.

Suggested Citation

  • Divya Kirti, 2017. "Why Do Bank-Dependent Firms Bear Interest-Rate Risk?," IMF Working Papers 17/3, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:17/3
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    Keywords

    Corporate finance; Interest-rate risk; bank lending; bank-dependent firms; Financial Markets and the Macroeconomy;

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