Exceptionally Low Interest Rate Policy, Risk-Taking Channel, and Bank Competition: Evidence from Loan-level Data

Abstract

This study investigates how bank competition affects the transmission of monetary policy through risk-taking channel. Using Japanese matched bank-firm loan data from the fiscal year 2005 to 2018, we test whether banks with weak balance-sheet lend to risky firms during low interest rate environment than banks with strong balance-sheet and their degree of risky lending is enhanced by bank competition. We find that transmission of monetary policy through risk taking channel vary according to bank competition. Risky lending by banks with poor capital during the low interest rate period is enhanced by bank competition. After the introduction of negative interest rate policy, the bank competition has a nonlinear effect on risk taking behavior of banks with abundant liquidity. Our findings remain mostly unchanged after conducting several robustness checks. Our results suggest that the effects of monetary policy through the risk-taking channel are asymmetrical and depend on bank competition in lending markets.