Fixed-rate loans amplify monetary policy impact on bank lending

This paper develops a quantitative macroeconomic model to analyze how heterogeneity in banks' interest-rate risk exposure shapes monetary policy transmission.

It establishes an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter only when bank solvency concerns become relevant.

Calibrating the model to the euro area, the research highlights pronounced institutional variation, with banks in countries like Belgium and Germany predominantly offering fixed-rate loans, while others such as Italy and Spain use variable rates.

Market frictions mean interest-rate risk hedging remains modest, leaving most banks exposed.

This raises critical questions for the European Central Bank regarding cross-country monetary-policy responses, a concern explicitly voiced during the 2022–2023 tightening cycle.

The study finds heterogeneity is quantitatively important because many banks operate near the solvency threshold.

When policy rates rise, fixed-rate banks face net interest margin (NIM) compression: funding costs increase while legacy loan income stays unchanged.

This erodes capital, pushing highly leveraged banks closer to the solvency threshold and triggering sharper deleveraging.

Variable-rate banks experience the opposite, with rising legacy loan rates widening margins and rebuilding capital.

The elasticity of new lending to monetary policy is approximately one-third larger in fixed-rate systems.

This divergence extends to financial stability, with rate hikes increasing bank failure rates in fixed-rate economies but reducing them in variable-rate systems.