Is bank debt special for the transmission of monetary policy? Evidence from the stock market. Unpublished manuscript, Universitat Pompeu Fabra

We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to \u85rms matters for the transmission of monetary policy. The \u85rst new dataset enables us to quantify the bank dependence of \u85rms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a \u85rm makes its stock price about 25 % more responsive to monetary policy shocks. We explore the channels through which this e¤ect occurs, and \u85nd that the stock prices of bank-dependent \u85rms that borrow from \u85nancially weaker banks display a stronger sensitivity to monetary policy shocks. This \u85nding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent \u85rms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This \u85nding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of oating-rates in bank loans and credit line agreements