Term Premium and Bank Lending
September 28, 2023
Summary
Examining the effect of the slope of the yield curve on economic activity through bank lending, the authors of this working paper show that a steeper yield curve associated with higher term premiums boosts bank profits and the supply of bank loans.
View PaperWorking Paper 2023-14a (Revised August 2026)
Abstract: We document an "expected bank profitability" channel linking the term premium to bank lending. We formalize this channel using a dynamic bank portfolio model predicting that a higher term premium raises banks' expected returns from maturity transformation, incentivizing credit provision, with stronger effects for more leveraged banks. Using supervisory microdata, the unanticipated term premium rise after the 2013 Taper Tantrum, and US Basel III capital surprises, we show that more leveraged banks expand lending more, supporting firm-level investment and growth. Our findings suggest unconventional monetary policies compressing the term premium may reduce bank lending, dampening their intended expansionary effects.
JEL classification: E44, E52, E58, G2
Key words: term premium, yield curve, bank lending, bank profitability, maturity transformation
Digital Object Identifier: https://doi.org/10.29338/wp2023-14
The authors thank their discussants, Joseph Abadi, Greg Duffee, Martin Götz, Lukas Kremens, Laura Moretti, Tyler Muir, Diane Pierret, Glenn Schepens, and Enrico Sette, for valuable comments. They also thank Tobias Adrian, Valentina Bruno, Anna Cieslak, Olivier Darmouni, Bill English, Itay Goldstein, Juan Morelli, Emi Nakamura, Bill Nelson, Pascal Paul, Hiroatsu Tanaka, Skander Van den Heuvel, Annette Vissing-Jorgensen, Frank Warnock, Jonathan Wright, Yu Xu, and participants at numerous conferences and seminars for helpful comments and suggestions. They thank Don Kim and Marcel Priebsch for sharing their term premium series and Daniel Beltran and Ruth Judson for discussions about the TIC data. They thank Tom Heintjes for editorial suggestions and Jack Spira, Jacob Bochner, and Alejandro Guillot for research assistance at different stages of the project. This paper was previously circulated under the title "Why does the yield curve predict GDP growth? The role of banks." They also thank the Center for Advancement of Data and Research in Economics (CADRE) at the Federal Reserve Bank of Kansas City for providing essential computational resources that contributed to the results reported in this paper. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Camelia Minoiu, Federal Reserve Bank of Atlanta; Andres Schneider, University of Miami; or Min Wei, Federal Reserve Board.
To receive e-mail notifications about new papers, subscribe. Under "Publications" select "Working Papers."