DP18293 Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply

• Fatih Altunok Yavuz Arslan Steven Ongena
13 Jul 2023

While higher interest rates increase the payments for borrowers with adjustable-rate mortgages (ARMs)
cutting their disposable income, higher rates also increase lenders’ interest income strengthening their balance
sheets. We find correspondingly that —when monetary conditions tighten — banks with higher ARM shares
see their stock prices increase, supply more credit, and obtain higher interest income compared to banks with
lower ARM shares. Therefore, more ARM credit outstanding may weaken monetary policy transmission. And
during a financial crisis when interest income becomes critical for banks, reductions in interest rates may be
challenging for those banks with very high ARM shares.