Why Do Bank-Dependent Firms Bear Interest-Rate Risk?

January 18, 2017

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Format: Chicago

Divya Kirti. Why Do Bank-Dependent Firms Bear Interest-Rate Risk?, (USA: International Monetary Fund, 2017) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

I document that floating-rate loans from banks (particularly important for bank-dependent firms) drive most variation in firms' exposure to interest rates. I argue that banks lend to firms at floating rates because they themselves have floating-rate liabilities, supporting this with three key findings. Banks with more floating-rate liabilities, first, make more floating-rate loans, second, hold more floating-rate securities, and third, quote lower prices for floating-rate loans. My results establish an important link between intermediaries' funding structure and the types of contracts used by non-financial firms. They also highlight a role for banks in the balance-sheet channel of monetary policy.

Subject: Bank credit, Banking, Financial institutions, Financial regulation and supervision, Financial services, Hedging, Loans, Money, Securities, Short term interest rates

Keywords: Bank assets, Bank credit, Bank debt, Bank holding company, Bank lending, Bank lending to firm, Bank liabilities push bank, Bank liability, Bank-dependent firm, Bank-dependent firms, Capital structure, Commercial bank, Corporate finance, Deposit pass-through, Floating-rate loan, Hedging, Interest-rate risk, Lending to firm, Liabilities push bank, Loans, Securities, Securities holding, Short term interest rates, WP

Publication Details

Pages:

56
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/003
Stock No:

WPIEA2017003
ISBN:

9781475568974
ISSN:

1018-5941

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