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

68 Pages Posted: 19 Feb 2013 Last revised: 12 Jul 2019

See all articles by Matthieu Gomez

Matthieu Gomez

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Augustin Landier

HEC

David Alexandre Sraer

University of California, Berkeley; Princeton University

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Date Written: July 9, 2019

Abstract

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

Gomez, Matthieu and Landier, Augustin and Sraer, David Alexandre and Thesmar, David, Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy (July 9, 2019). Available at SSRN: https://ssrn.com/abstract=2220360 or http://dx.doi.org/10.2139/ssrn.2220360

Matthieu Gomez

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Augustin Landier

HEC ( email )

France
+33630006051 (Phone)

HOME PAGE: http://https://sites.google.com/site/augustinlandier/

David Alexandre Sraer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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