Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy
72 Pages Posted: 19 Feb 2013 Last revised: 24 Mar 2020
Date Written: July 9, 2019
The cash-flow exposure of banks to interest rate risk, or income gap, is a significant determinant of the transmission of monetary policy to bank lending and real activity. When the Fed Funds rate rises, banks with a larger income gap generate stronger earnings and contract their lending by less than other banks. This finding is robust to controlling for factors known to affect the transmission of monetary policy to bank lending. It also holds on loan-level data, even when we control for firm-specific credit demand. When monetary policy tightens, firms borrowing from banks with a larger income gap reduce their investment by less than other firms.
Keywords: Interest rate risk, monetary policy, bank lending
JEL Classification: E52, G21, E44
Suggested Citation: Suggested Citation