Camelia Minoiu, Andres Schneider, and Min Wei
Working Paper 2025-5
June 2025
Full text
Abstract:
We show that the slope of the yield curve affects bank lending and economic activity through an "expected bank profitability channel." Using detailed banking data and term premium shocks identified via instrumental variables or event studies, we show that a steeper yield curve—when driven by higher term premiums rather than higher expected short rates—increases bank profits and loan supply. Intuitively, a higher term premium raises the expected returns from maturity transformation—a core banking activity—thereby incentivizing bank lending. This effect is more pronounced for banks with higher leverage. We interpret these findings using a simple bank portfolio model.
JEL classification: E44, E52, E58, G2
Key words: predictive power of the yield curve; term spread; term premium; bank lending; bank profitability; interest rate risk
https://doi.org/10.29338/wp2025-05
Camelia Minoiu is with the Federal Reserve Bank of Atlanta. Andres Schneider and Min Wei are with the Federal Reserve Board. The authors thank their discussants, Joseph Abadi, Greg Duffee, Martin Gotz, Lukas Kremens, Laura Moretti, Tyler Muir, Diane Pierret, Glenn Schepens, and Enrico Sette, for valuable comments. They also thank 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 Jack Spira, Jacob Bochner, and Alejandro Guillot for research assistance at different stages of the project. 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 in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
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