We show that the cash-flow exposure of banks to interest rate risk, or income gap, affects the transmission of monetary policy shocks to bank lending and real activity. We first use a large panel of U.S. banks to show that the sensitivity of bank profits to interest rates increases significantly...

We use a unique dataset of German banks’ exposure to interest rate risk to derive the following statements about their exposure to this risk and their earnings from term transformation. The systematic factor for the exposure to interest rate risk moves in sync with the shape of the term...

We investigate whether banks actively manage their exposure to interest rate risk in the short run. Using bank‐level data of German banks for the period 2011Q4–2017Q2, we find evidence that banks actively manage their interest rate risk exposure in their banking books. Specifically, they...