Landier, Augustin, Sraer, David and Thesmar, David (2013) Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy. TSE Working Paper, n. 13-438, Toulouse

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Abstract

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.