Banks Exposure to Interest Rate Risk and the Transmission of Monetary Policy
43 Pages Posted: 23 Jan 2015
There are 3 versions of this paper
Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy
Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
How Accurate are Value-at-Risk Models at Commercial Banks
By Jeremy Berkowitz and James M. O'brien
-
The Predictive Ability of Several Models of Exchange Rate Volatility
By Kenneth D. West and Dongchul Cho
-
Bank Capital and Value at Risk
By Patricia Jackson, David Maude, ...
-
Bank Capital Requirements for Market Risk: The Internal Models Approach
By Darryll Hendricks and Beverly Hirtle