Events at CERGE-EI

Galo Nuño

Bank of Spain

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Meeting number: 2744 891 9576
Meeting password: 323881

Authors: Jorge Abad, Saki Bigio, Salomon Garcia-Villegas, Joël Marbet and Galo Nuño

Abstract: How does heterogeneity in banks’ interest-rate risk exposure shapemonetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when banks face occasionally binding capital constraints. Calibrating themodel to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward regulatory limits, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks suffer net interest margin compression—funding costs increase while legacy loan income stays unchanged—eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. These findings highlight relevant trade-offs between monetary and macroprudential policy and provide a theoretical foundation for gradualism in monetary policy.

Full Text: The Heterogeneous Bank Lending Channel of Monetary Policy