Interest Rate Risk Sharing in the Supply of Corporate Loans

Using loan-level data from the Mexican credit registry, this study investigates the association between interest rate risk regulation on non-maturity deposits' (NMDs) and banks' lending to firms. Banks following a standard... [ view full abstract ]

Using loan-level data from the Mexican credit registry, this study investigates the association between interest rate risk regulation on non-maturity deposits' (NMDs) and banks' lending to firms. Banks following a standard approach (SA) cannot allocate NMDs beyond the 2-year maturity bucket. There is no ex-ante cap for banks with an internal model (IM). Exploiting within bank variation in the NMDs' classification, I find that SA banks reduce more the maturity of fixed rate loans relative to IM banks, transfering more interest rate risk to firms. SA banks also charge a premium and commit a lower amount of such loans. These results provide evidence that the interest rate risk regulation affects banks' hedging strategies and that banks do not rely solely on financial hedging to manage their risk exposure.