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Why are Banks Exposed to Monetary Policy?

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  • Sebastian Di Tella
  • Pablo Kurlat

Abstract

We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch.

Suggested Citation

  • Sebastian Di Tella & Pablo Kurlat, 2017. "Why are Banks Exposed to Monetary Policy?," NBER Working Papers 24076, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24076
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    References listed on IDEAS

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    Cited by:

    1. Andrew G. Atkeson & Adrien d’Avernas & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2019. "Government Guarantees and the Valuation of American Banks," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 81-145.
    2. Rhys Bidder & John Krainer & Adam Shapiro, 2021. "De-leveraging or de-risking? How banks cope with loss," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 100-127, January.
    3. Porcellacchia, Davide, 2020. "What is the tipping point? Low rates and financial stability," Working Paper Series 2447, European Central Bank.
    4. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," NBER Working Papers 24582, National Bureau of Economic Research, Inc.
    5. David Sraer & Valentin Haddad, 2016. "The Banking View of Bond Risk Premia," 2016 Meeting Papers 814, Society for Economic Dynamics.
    6. Markus K. Brunnermeier & Yann Koby, 2018. "The Reversal Interest Rate," NBER Working Papers 25406, National Bureau of Economic Research, Inc.
    7. Rhys Bidder & John Krainer & Adam Shapiro, 2021. "De-leveraging or de-risking? How banks cope with loss," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 100-127, January.
    8. Pablo Kurlat, 2018. "Deposit Spreads and the Welfare Cost of Inflation," NBER Working Papers 25385, National Bureau of Economic Research, Inc.
    9. Kurlat, Pablo, 2019. "Deposit spreads and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 78-93.
    10. Pablo Kurlat, 2019. "Deposit Spreads and the Welfare Cost of Inflation," 2019 Meeting Papers 211, Society for Economic Dynamics.
    11. Dixit, Shiv & Subramanian, Krishnamurthy, 2020. "Bank Coordination and Monetary Transmission: Evidence from India," MPRA Paper 103169, University Library of Munich, Germany.
    12. Peter Hoffmann & Sam Langfield & Federico Pierobon & Guillaume Vuillemey, 2019. "Who Bears Interest Rate Risk?," Review of Financial Studies, Society for Financial Studies, vol. 32(8), pages 2921-2954.
    13. Wang, Olivier, 2020. "Banks, low interest rates, and monetary policy transmission," Working Paper Series 2492, European Central Bank.
    14. Andrea Landi, Alex Sclip, Valeria Venturelli, 2019. "The effect of the Fed zero-lower bound announcementon bank profitability and diversification," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0079, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    15. Valentin Haddad & David Sraer, 2020. "The Banking View of Bond Risk Premia," Journal of Finance, American Finance Association, vol. 75(5), pages 2465-2502, October.
    16. Haddad, Valentin & Sraer, David, 2019. "The Banking View of Bond Risk Premia," CEPR Discussion Papers 14207, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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