This paper analyzes the transmission of realized interest rate risk to bank lending. It exploits unique
supervisory information about the interest rate risk exposure of Swiss banks net of hedging. By weakening
the banks’ economic capital, realized interest rate risk explains on average around one eighth or 30 basis
points of the predicted total reduction in cumulative loan growth a year after an upward shock in nominal
rates by one percentage point. Moreover, heterogeneity in exposures implies that the effects would differ
across institutions. Finally, bank lending is mainly driven by the banks’ capital- rather than their liquidity-situation.