BIS Study Finds Bank Interest Rate Risk Alters Monetary Policy Transmission
A new Bank for International Settlements (BIS) working paper finds that banks with higher ex-ante interest rate risk reduce lending and shorten loan maturities when policy rates rise. This behavior significantly impacts monetary policy transmission.
Interest rate risk curbs private bank lending
The study finds that banks with higher ex-ante exposure to interest rate risk reduce their lending and shorten loan maturities once interest rates begin to rise.
This effect is valid only for private banks, not state-owned banks.
It is particularly pronounced for private banks with low capital ratios, highlighting the importance of bank capital in contractionary periods.
SMEs face asymmetric lending conditions
The effect persists at the firm level, where small and medium-sized enterprises (SMEs) are unable to avoid reductions in their loans by switching to less-exposed banks.
This reveals an asymmetric deterioration in SMEs' lending conditions relative to large firms.
The research also documents real effects, showing that SMEs, but not large firms, with higher exposure to interest rate risk through their banks experience declines in sales and employment.