Why do bank-dependent firms bear interest-rate risk? |
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| Institution: | 1. Stockholm University, 106 91 Stockholm, Sweden, and Research Institute of Industrial Economics, Box 55665, 112 15 Stockholm, Sweden;2. Saïd Business School, University of Oxford, Park End Street, Oxford OX1 1HP, UK;1. Cass Business School, London, United Kingdom;2. CEPR, United Kingdom;3. Bank for International Settlements, Basel, Switzerland;1. Wharton School of the University of Pennsylvania and NBER, United States;2. Emory University, Federal Reserve Bank of Atlanta, and NBER, United States;1. Department of Economics, ISEG/UL - University of Lisbon, Portugal;2. Research in Economics and Mathematics, ISEG/UL – University of Lisbon, Portugal;3. Research Unit on Complexity and Economics, ISEG/UL- University of Lisbon, Portugal;4. Department of Economics, REM – Research in Economics and Mathematics, UECE – Research Unit on Complexity and Economics, ISEG/UL – University of Lisbon, Portugal;1. Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106, USA;2. Board of Governors of the Federal Reserve System, 20th and C Street N.W., Washington, DC 20551, USA |
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| Abstract: | 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 prefer to supply floating-rate loans, due to their finite ability to transform short-duration deposit liabilities into long duration assets. Three key findings support this argument: banks with more floating-rate liabilities make more floating-rate loans, hold more floating-rate securities, and quote lower prices for floating-rate loans. Intermediary funding structures therefore help determine what types of contracts non-financial firms use. Banks transmit rising policy rates to firms by contractually raising interest rates on existing loans, not just by reducing the supply of new loans. |
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