It is our pleasure to announce that Abdullah Mamun and his co-author just received the Southwestern Society of Economists 2011 McGraw-Hill/Irwin Distinguished Paper Award.  Details of the paper are below.  Congratulations to Dr. Mamun! 

Monetary Policy Surprise and Commercial Banks♣

Abdullah Mamun (Edwards School of Business; University of Saskatchewan)

M. Kabir Hassan (College of Business; University of New Orleans)

Abstract

In this paper we investigate how monetary policy affects commercial banks. Using Federal funds futures rate we calculate anticipated and unanticipated component of monetary policy action on bank equity return. Similar to non-financial firms we find that only unanticipated component affect bank equity return. Following previous literature we identify six bank specific characteristics that may affect the sensitivity of bank equity return to monetary policy innovation; they are: i) maturity composition of nominal contracts ii) bank capital iii) liquidity iv) dependence on interest income v) composition of deposit and vi) the extent of their off-balance sheet activity. We find smaller less liquid banks have higher sensitivity; higher ratio of demand deposit to total deposit increases this sensitivity to monetary policy innovations. We confirm maturity mismatch increases the sensitivity, a higher ratio of net-interest income to total income increases this sensitivity. In addition we also find that the capital constrained banks have higher sensitivity to monetary policy innovations. Most importantly, we show that banks off-balance sheet hedging of interest rate risk significantly affect bank return sensitivity to monetary policy innovation.