Monetary Policy and Bank Risk-Taking: Evidence from Emerging Economies

Abstract

This paper addresses the impact of monetary policy on banks’ risk-taking levels by using the bank-level panel data from more than 1000 banks in 33 emerging economies during 2000-2012. We find that, consistent with the proposition of the “bank risk-taking channel” of monetary policy transmission, banks’ riskiness increases when monetary policy is eased. The effect is more conspicuous in small and less liquid banks, and in countries with a stronger deposit insurance scheme and a fixed exchange rate regime. In addition, we find that the monetary policy-bank risk nexus is dampened in more concentrated banking markets and when monetary policy is more transparent.