Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market

Working Paper: CEPR ID: DP9696

Authors: Filippo Ippolito; Ali Ozdagli; Ander Perez

Abstract: We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.

Keywords: bank; financial health; bank lending channel; firm financial constraints; floating interest rates; monetary policy transmission

JEL Codes: E52; G21; G32

Causal Claims

Cause	Effect
Bank Dependence (G21)	Stock Price Sensitivity to Monetary Policy Shocks (E39)
Bank Dependence (G21)	Stock Price Reaction to Federal Funds Rate Increase (E43)
Bank Lending Channel (G21)	Sensitivity to Monetary Policy Shocks (E39)
Weak Bank Health (F65)	Sensitivity to Monetary Policy Shocks (E39)
Interest Rate Risk Hedging (E43)	Sensitivity to Monetary Policy Shocks (E39)