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

43 Pages Posted: 23 Jan 2015

See all articles by Augustin Landier

Augustin Landier

HEC

David Alexandre Sraer

University of California, Berkeley; Princeton University

David Thesmar

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2014

Abstract

We show that banks' cash flow exposure to interest rate risk, or income gap, plays a crucial role in their lending behavior following monetary policy shocks. 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 bank-level intensity of the lending channel.

Keywords: bank lending, interest rate risk, monetary policy

JEL Classification: E44, E52, G21

Suggested Citation

Landier, Augustin and Sraer, David Alexandre and Thesmar, David, Banks Exposure to Interest Rate Risk and the Transmission of Monetary Policy (December 2014). CEPR Discussion Paper No. DP10300. Available at SSRN: https://ssrn.com/abstract=2554375

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

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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