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

62 Pages Posted: 5 Nov 2020

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

Princeton University; University of California, Berkeley

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2016

Abstract

We show that the cash-flow exposure of banks to interest rate risk, or income gap, affects the transmission of monetary policy shocks to bank lending and real activity. We first use a large panel of U.S. banks to show that the sensitivity of bank profits to interest rates increases significantly with measured income gap, even when banks use interest rate derivatives. We then document that, in the cross-section of banks, income gap predicts the sensitivity of bank lending to interest rates. The effect of income gap is larger or similar in magnitudes to that of previously identified factors, such as leverage, bank size or even asset liquidity. To alleviate the concern that this result is driven by the endogenous matching of banks and firms, we use loan-level data and compare the supply of credit to the same firm by banks with different income gap. This analysis allows us to trace the impact of banks’ income gap on firm borrowing capacity, investment and employment, which we find to be significant.

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 Sraer, David Alexandre and Thesmar, David, Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy (June 1, 2016). ESRB: Working Paper Series No. 2016/13, Available at SSRN: https://ssrn.com/abstract=3723359 or http://dx.doi.org/10.2139/ssrn.3723359

Matthieu Gomez (Contact Author)

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

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Augustin Landier

HEC ( email )

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

David Alexandre Sraer

Princeton University ( email )

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Princeton, NJ 08544-0708
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University of California, Berkeley ( email )

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Berkeley, CA 94720
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David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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