Why do bank-dependent firms bear interest-rate risk?

Abstract:

Firms vary widely in the extent to which they are exposed to interest rates through floating-rate debt. I document that bank dependence is the key driver of this exposure: banks largely lend to firms at floating rates, which disproportionately affects firms that are more dependent on bank lending. In turn, I argue that banks lend to firms at floating rates because they themselves have floating-rate liabilities. Indeed, banks with more floating-rate liabilities make more floating-rate loans. To rule out the alternative interpretation that bank-dependent firms demand floating-rate loans, I show that banks with more floating-rate liabilities also hold more floating-rate securities (which would only add risk if banks found floating-rate loans risky), and quote lower prices for floating- rate loans relative to fixed-rate loans (which points to supply rather than demand, as these banks make more floating-rate loans). My results establish an important link between the way financial intermediaries are funded and the types of contracts used by non-financial firms. They also highlight a role for banks in the Bernanke & Gertler (1995) balance-sheet channel of monetary policy.

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Last updated on 11/18/2015