This paper analyzes the transmission of realized interest rate risk to bank lending. It exploits unique supervisory information about the interest rate risk exposure of Swiss banks net of hedging. By weakening the banks’ economic capital, realized interest rate risk explains on average around one eighth or 30 basis points of the predicted total reduction in cumulative loan growth a year after an upward shock in nominal rates by one percentage point. Moreover, heterogeneity in exposures implies that the effects would differ across institutions. Finally, bank lending is mainly driven by the banks’ capital- rather than their liquidity-situation.

We study the impact of higher bank capital requirements on corporate lending spreads using granular bank- and loan-level data. Our empirical strategy employs the heterogeneity in capital requirements across banks and time of implementation in Switzerland. We find that changes in the capital deviation from the regulatory minimum affect lending spreads asymmetrically. In response to a reduction in the capital deviation, banks with deficits with respect to their risk-weighted capital requirement raise spreads relative to banks with surpluses and de-leverage. Banks respond to higher requirements by raising spreads and, for deficit banks, by cutting lending.