Working Paper: CEPR ID: DP10300
Authors: Augustin Landier; David Sraer; David Thesmar
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 Codes: E44; E52; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income gap (D31) | Lending sensitivity (G21) |
| Income gap (D31) | Quarterly earnings sensitivity (C22) |
| Income gap (D31) | Lending channel of monetary policy transmission (E51) |
| Interest rate changes (E43) | Lending behavior (G21) |
| Income gap (D31) | Sensitivity of profits to interest rates (E43) |