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

Augustin Landier, David Sraer, David Thesmar

NBER Working Paper No. 18857
Issued in February 2013
NBER Program(s):   CF   ME

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.

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Document Object Identifier (DOI): 10.3386/w18857

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