Banks’ exposure to interest rate risk and the transmission of monetary policy

By A. Landier, David Sraer, David Thesmar. Journal of Monetary Economics, 2020

204 citations recorded by the source corpus.

We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. 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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/be26e6ea61f1bb0bb9ef017ad35d86397bd3612d

How researchers see this paper

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In Economics and Econometrics

1. Amir Kermani
2. Marco Di Maggio
3. C. Palmer

In Finance

1. Amir Kermani
2. Marco Di Maggio
3. C. Palmer

Citations in the corpus

• How Quantitative Easing Works: Evidence on the Refinancing Channel (2016, background): “13 Finally, Chakraborty, Goldstein and MacKinlay (2016) and Rodnyansky and Darmouni (2016) look explicitly at the effect of QE on bank lending, with the former showing that the banks that are more active in the MBS market increased their mortgage origination market share following the LSAPs and the ”
• Banking on Deposits: Maturity Transformation without Interest Rate Risk (2018, unknown): “This can explain the finding of Gomez et al. (2021) that banks with a bigger income gap (a measure of maturity mismatch) contract lending more when interest rate rise.”
• A capital structure channel of monetary policy (2018, unknown): “, different leverage and therefore different credit risk) respond differently to monetary policy shocks (Kashyap and Stein, 1995, 2000; Kishan and Opiela, 2000; Campello, 2002; Gambacorta and Mistrulli, 2004; Gomez et al., 2016).”
• The Credit Line Channel (2020, unknown): “As Gomez et al. (2020), we use the so-called income gap, a measure of the repricing sensitivity of banks’ assets and liabilities over the near term, to differentiate banks by their exposure to a monetary policy shock.”