Bank Characteristics and Stock Reactions to Federal Funds Rate Target Changes

Abstract

This study investigates how bank characteristics affect bank stock reactions to changes in the federal funds rate target. Using a dataset of all publicly listed banks of the United States from October 1988 through December 2007, both our regression analysis and categorical analysis provide supportive evidence that (1) the effect of changes in the federal funds rate target is more pronounced on large banks than on small banks; (2) banks that rely more on non-deposit funding sources are more responsive to such changes; (3) banks with higher capital-to-asset ratio are less sensitive to unexpected target changes, but when the capital ratio increases to a certain level, the marginal effect diminishes. We observe that business activity mix does not matter to banks’ sensitivity to monetary shocks. This study is among the first to investigate how bank stock sensitivity to monetary shocks is conditional on various bank characteristics. Our findings bear directly on the research of the causes and consequences of the 2008 financial crisis.