The Risk-Taking Channel of Monetary Policy: Do Macroprudential Regulation and Central Bank Independence Influence the Transmission of Interest Rates?

Abstract

This study focuses on the risk-taking channel of monetary policy and its interaction with a supervisory-independence channel for commercial banks from Central and Eastern Europe, during the 2005-2011 period. Our results support the existence of an inverse relationship between expansionary monetary policy and bank risk-taking, meaning that very low interest rates lead to higher bank risk-taking. Also, our results show that the tight macroprudential regulation framework mitigates the negative impact of low rates. Furthermore, we show that central bank independence exert the same beneficial effect on the bank risk-taking channel because results show a dampening effect of central bank independence on the relation between expansionary monetary policy and bank risk-taking. Moreover, our results demonstrate that the risk-taking channel of monetary policy is even stronger in times of financial crisis.