Banks' Exposure to Interest Rate Risk and The Transmission of Monetary Policy
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.
Non-Technical Summaries
- Banks ... with a smaller disparity between the interest rate sensitivity of their assets and liabilities will not curtail their lending...
Published Versions
Gomez, Matthieu & Landier, Augustin & Sraer, David & Thesmar, David, 2021. "Banks’ exposure to interest rate risk and the transmission of monetary policy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 543-570. citation courtesy of 
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