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

Author

Listed:
  • 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.

Suggested Citation

  • Augustin Landier & David Sraer & David Thesmar, 2013. "Banks' Exposure to Interest Rate Risk and The Transmission of Monetary Policy," NBER Working Papers 18857, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18857
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Morris, Charles S. & Regehr, Kristen, 2014. "What explains low net interest income at community banks?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 59-87.
    2. Juliane Begenau & Monika Piazzesi & Martin Schneider, 2015. "Banks' Risk Exposures," NBER Working Papers 21334, National Bureau of Economic Research, Inc.
    3. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    4. Adrian, Tobias & Boyarchenko, Nina & Shachar, Or, 2017. "Dealer balance sheets and bond liquidity provision," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 92-109.
    5. Jérôme Creel & Paul Hubert & Mathilde Viennot, 2016. "The effect of ECB monetary policies on interest rates and volumes," Applied Economics, Taylor & Francis Journals, vol. 48(47), pages 4477-4501, October.
    6. Ruprecht, Benedikt & Entrop, Oliver & Kick, Thomas & Wilkens, Marco, 2013. "Market timing, maturity mismatch, and risk management: Evidence from the banking industry," Discussion Papers 56/2013, Deutsche Bundesbank.
    7. 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 1384, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
    9. De Marco, Filippo & Wieladek, Tomasz, 2015. "The real effects of capital requirements and monetary policy: evidence from the United Kingdom," Bank of England working papers 573, Bank of England.
    10. Sebastian Di Tella & Pablo Kurlat, 2017. "Why are Banks Exposed to Monetary Policy?," NBER Working Papers 24076, National Bureau of Economic Research, Inc.
    11. Jerome Creel & Paul Hubert & Mathilde Viennot, 2013. "Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies," Working papers wpaper34, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    12. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2014. "A Model of Monetary Policy and Risk Premia," NBER Working Papers 20141, National Bureau of Economic Research, Inc.
    13. Knott, Samuel & Richardson, Peter & Rismanchi, Katie & Sen, Kallol, 2014. "Financial Stability Paper 31: Understanding the fair value of banks’ loans," Bank of England Financial Stability Papers 31, Bank of England.
    14. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.
    15. M. Girotti, 2016. "How Monetary Policy Changes Bank Liability Structure and Funding Cost," Working papers 590, Banque de France.
    16. repec:eee:jbfina:v:87:y:2018:i:c:p:164-186 is not listed on IDEAS
    17. repec:eee:jimfin:v:82:y:2018:i:c:p:45-70 is not listed on IDEAS
    18. Claessens, Stijn & Coleman, Nicholas & Donnelly, Michael, 2017. ""Low-For-Long� Interest Rates and Banks' Interest Margins and Profitability: Cross-Country Evidence," CEPR Discussion Papers 11842, C.E.P.R. Discussion Papers.
    19. Mora, Nada, 2014. "The weakened transmission of monetary policy to consumer loan rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 1-26.
    20. Rodney Ramcharan & Amir Kermani & Marco Di Maggio, 2015. "Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging," 2015 Meeting Papers 256, Society for Economic Dynamics.
    21. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h is not listed on IDEAS
    22. Mark Iarovyi & sasson Bar Yosef & Itzhak Venezia, 2017. "Implied Maturity Mismatches and Investor Disagreement," Proceedings of Economics and Finance Conferences 4507072, International Institute of Social and Economic Sciences.
    23. Stijn Claessens & Nicholas Coleman & Michael S. Donnelly, 2017. ""Low-For-Long" Interest Rates and Banks' Interest Margins and Profitability : Cross-Country Evidence," International Finance Discussion Papers 1197, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G3 - Financial Economics - - Corporate Finance and Governance

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