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

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 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. Cover; Contents; 1 Introduction; 2 Firms' exposure to interest-rate risk; 2.1 Credit rating, firm size and hedging; 3 Theoretical framework; 3.1 Banks; 3.2 Bank-dependent firms; 3.3 Testable predictions; 4 Empirics: main results; 4.1 Tests of primary hypotheses; 4.2 Deposit pass-through, competition and size; 4.3 Time series analysis; 4.4 Historical analysis; 5 Implications for transmission of monetary policy; 6 Conclusion; A Tables and Figures.