Working Paper Revision

Term Premium and Bank Lending

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 U.S. 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; G20;

https://doi.org/10.17016/FEDS.2023.049r1

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2026-07-06

Number: 2023-049r1

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