Abstract

http://ssrn.com/abstract=2220360
 
 

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


Augustin Landier


Toulouse School of Economics

David Alexandre Sraer


University of California, Berkeley; Princeton University

David Thesmar


HEC Paris - Finance Department

July 16, 2015


Abstract:     
We show that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. While banks have, on average, positive levels of income gap - their assets are more sensitive to interest rate changes than their liabilities - there is substantial heterogeneity in the cross-section of banks in how exposed they are to interest rate risk. In a first step, we show that the sensitivity of bank profits to interest rates increases significantly with their income gap, even when banks use interest rate derivatives. In a second step, we show that the income gap also predicts the sensitivity of bank lending to interest rates, both for commercial & industrial loans and for mortgages. 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. We conclude that banks' exposure to interest rate risk is an important determinant of the lending channel.

Number of Pages in PDF File: 50

Keywords: Interest rate risk, monetary policy, bank lending

JEL Classification: E52, G21, E44


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Date posted: February 19, 2013 ; Last revised: July 16, 2015

Suggested Citation

Landier, Augustin and Sraer, David Alexandre and Thesmar, David, Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy (July 16, 2015). Available at SSRN: http://ssrn.com/abstract=2220360 or http://dx.doi.org/10.2139/ssrn.2220360

Contact Information

Augustin Landier
Toulouse School of Economics ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
David Alexandre Sraer
University of California, Berkeley ( email )
310 Barrows Hall
Berkeley, CA 94720
United States
Princeton University ( email )
22 Chambers Street
Princeton, NJ 08544
United States
David Thesmar (Contact Author)
HEC Paris - Finance Department ( email )
1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 39 67 94 12 (Phone)
HOME PAGE: http://www.hec.fr/hec/eng/professeurs_recherche/p_liste/p_fiche.php?num=135

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