Risk-taking Channel Of Monetary Policy Research Articles

Bank's Risk-Taking Channel of Monetary Policy and Tltro: Evidence from the Eurozone

Bank's Risk-Taking Channel of Monetary Policy and Tltro: Evidence from the Eurozone

Financial Cycles with Heterogeneous Intermediaries

Abstract We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.

The Role of Systemic Risk Spillovers in the Transmission of Euro Area Monetary Policy

This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk, since they reduce market uncertainty and funding risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response.

Risk Appetite and the Risk-Taking Channel of Monetary Policy

Monetary policy affects financial markets and the broader economy in part by changing the risk appetite of investors. This article provides new evidence for this so-called risk-taking channel of monetary policy by revisiting and extending event-study analysis of Federal Open Market Committee announcements. We document significant effects of unexpected monetary policy changes on risk indicators drawn from equity, fixed-income, credit, and foreign exchange markets. We develop a new index of risk appetite based on the common component of these indicators. Surprise monetary easing leads to strong and persistent increases in our index, and vice versa for tightening surprises, consistent with the view that monetary policy affects asset prices in large part through its effects on risk appetite. We discuss the implications of the risk-taking channel for monetary policy transmission, optimal monetary policy, and financial stability.

Bank liquidity and the risk-taking channel of monetary policy: An empirical study of the banking system in China.

This paper addresses the impact of bank liquidity on risk-taking behaviour of Chinese banks, and provides evidence for a risk-taking channel of monetary policy operating through bank liquidity. By using bank-level panel data from 123 Chinese commercial banks during 2003-2018, it is found that banks facing lower liquidity risk will be encouraged to take more risk. Moreover, loose monetary policy leads to more aggressive risk-taking by reducing the bank liquidity risk, namely a liquidity risk-taking channel of monetary policy. These findings suggest that authorities should give full consideration to the influence of the monetary policy on bank risk-taking through bank liquidity channels.

The internationalization of domestic banks and the credit channel of monetary policy

How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.

Monetary Policy, Credit Risk, and Profitability: The Influence of Relationship Lending on Cooperative Banks' Performance

Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold low-for-long. Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability through higher credit risk when interest rates fall, relationship-based cooperative banks instead increase their capital buffers to ensure credit access to their customers, which mainly comprise small businesses and high-risk firms.

What does peer-to-peer lending evidence say about the Risk-Taking Channel of monetary policy?

This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we provide evidence of monetary policy's impact on a nonbank financial institution's risk-taking. We find that the search-for-yield is the main driving force of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and greater riskiness of credit allocation. However, these changes do not necessarily relate to a larger loan amount on average.

Credit supply conditions and business cycles: New evidence from bank lending survey data

In this study, we utilize an Autoregressive Distributed Lag (ARDL) model in order to investigate the impact of changing lending standards on aggregate economic activity, considering the period 2000–2017 and five major economies, that is, Canada, Germany, Japan, the UK, and the US. We capture lending conditions using bank lending survey data that help extract the credit-supply side of the shock and, thus, direct the focus onto loan supply-factors. The main findings document that shocks associated with changes in lending standards play a substantial role in determining changes in real economic activity within each country. It should also be noted that these results remain robust even when we consider a structural break in our data and investigate these effects separately for the period immediately after the outbreak of the Global Financial Crisis of 2007−09. Overall, the findings suggest that bank lending survey data provide important informational content and deepen our understanding regarding changes in real economic activity. On a final note, we provide further insights regarding the relationship of both price and non-price elements of bank lending, particularly considering the risk-taking channel of monetary policy.

Modelling the Risk-taking Channel of Monetary Policy in the Russian Economy

The main purpose of this paper is to test the efficiency of the risk-taking channel in the Russian economy. The existence of this channel may be an additional argument for the Bank of Russia’s cautious policy regarding changes in the key rate, since its sharp decline may cause financial instability, as banks reallocate their funds to riskier higher-yield assets. Z-score and the level of non-performing loans calculated according to the quarterly financial statements of credit institutions have been selected as a measure of risk. Econometric analysis revealed a shift toward riskier operations in response to a decrease in key and market interest rates. It also confirmed the hypothesis that the risk-taking channel is less effective for large banks.

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.

Risk-Shifting, Fuzzy Capital Constraint, and the Risk-Taking Channel of Monetary Policy

We construct a model where risk shifting can be moderated by capital requirements. Imperfect information about the level of capital per unit of risk, however, introduces uncertainty about the risk exposure of intermediaries. Over-estimation of the capital held by financial intermediaries, or the extent of regulatory arbitrage, may induce households to wrongly infer from higher asset prices that the fundamentals of risky assets have improved. This mechanism can notably explain the low risk premia paid by U.S. financial intermediaries between 2000 and 2007 in spite of their increased exposure to risk through higher leverage. Moreover, the lower the level of the risk-free interest rate, the more risk is under-estimated.

Effect of monetary policy on bank risk: does market structure matter?

PurposeThe purpose of this paper is to investigate the risk-taking channel of monetary policy transmission in the Chinese banking industry. This study also investigates the role of various other factors in the risk-taking channel.Design/methodology/approachThis study used panel data from 2000 to 2012, and a dynamic panel model (Difference GMM) was applied.FindingsThe empirical findings of this paper suggest that loose monetary policy rates increase bank risk-taking. Unlike previous studies, the results of this paper suggest that the bank-specific factors (size, liquidity and capitalization) do not significantly affect the risk-taking channel. However, the market structure does have a stabilizing effect on monetary policy transmission and the risk-taking channel. Higher market power weakens the risk-taking channel of monetary policy transmission.Practical implicationsOf significance to the policymakers' point of view is that loose monetary policy induces banks to take excessive risks. However, such effects can be mitigated by encouraging a proper level of market power in banking markets.Originality/valueThis study investigated the risk-taking channel of monetary policy transmission for the Chinese banking industry. Due to the unique features of the People's Bank of China (PBC, Central Bank of China) policy, this study also contributes to the literature by comparing price-based and quantity-based monetary policy tools and their effectiveness in financial stability and monetary policy transmission. Furthermore, the role of market structure is also investigated in the risk-taking channel.

Leverage and Risk-Taking Channel of Monetary Policy: Evidence from the Euro Area Banking Industry

We present evidence for the euro area of a risk–taking channel of monetary policy induced by a low interest rate environment following the 2008 Global Financial Crisis (GFC). Based on dynamic panel techniques, we find that credit risk (measured ex–ante and ex–post) is negatively associated with variations in interest rates, while competition in national banking industries tends to enhance this effect. Such negative relationship is also most pronounced for banks with relatively high levels of leverage, which is consistent with a search for yield effect. Eventually, we identify nonlinearities depending on the level of bank capitalization. These findings for the euro area are strikingly different from the U.S. banking industry, confirming that time, geographical circumstances, and local banking market conditions are key in understanding the impact of monetary policy on credit risk. This paper also points to the importance for theoretical literature to consider alternative channels of risk-taking in addition to traditional portfolio rebalancing channels.

Z-score를 이용한 통화정책 위험선호경로에 관한 연구

Z-score를 이용한 통화정책 위험선호경로에 관한 연구

Monetary policy and systemic risk-taking in the euro area banking sector

Available empirical evidence on the significance of the (micro) risk-taking channel of monetary policy is not enough to indicate a threat to financial stability. Evidence of risk-taking with systemic risk implications is necessary. Statistical measures that capture systemic risk in all its forms within a structural factor-augmented vector autoregressive model suggest that conventional and unconventional monetary policies have resulted in systemic risk-taking in the euro area banking sector. Systemic risk has taken the form of an increase in the banking sector’s vulnerability via contagion and interconnectedness. Banks’ balance sheets, however, do not account for the full transmission from (micro) risk taking to systemic risk-taking. The main policy implication is that a persistently accommodative monetary policy may drive a monetary authority with a price stability mandate to consider a possible trade-off with financial stability. At a minimum, coordination between monetary and macro-prudential policies requires serious consideration.

Monetary Policy and Systemic Risk-taking in the Euro Area Banking Sector

Available empirical evidence on the significance of the (micro) risk-taking channel of monetary policy is not sufficient to indicate a threat to financial stability. This research has the objective of determining whether conventional and unconventional monetary policies have resulted in systemic risk-taking. To that end, it uses statistical measures that capture systemic risk in the banking sector of the euro area in all its forms allowing for the time-varying non-linearities and feedback effects typical of financial markets. The methodology is a structural factor-augmented vector autoregressive (FAVAR) model. The main result is that there is systemic risk-taking in the euro area banking sector. It takes the form of an increase in the banking sector’s vulnerability via contagion and interconnectedness. Banks’ balance sheets, however, do not account for the full transmission from (micro) risk taking to systemic risk-taking confirming the importance of accounting for time-varying non-linearities and feedback effects. The main policy implication is that persistently accommodative monetary policy geared toward preserving price stability may face a trade-off with financial stability. In that case, monetary policy will require coordination with macro-prudential policy.

Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Loan Market

We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These results are consistent with a search for yield by certain types of shadow banks and, to the extent that Federal Reserve policies affected longer-term rates, the results are also consistent with the presence of a risk-taking channel of monetary policy. Finally, we find that longer-term interest rates have only a modest effect on loan spreads.

Risk taking and low longer-term interest rates: Evidence from the U.S. syndicated term loan market

We use supervisory data to investigate the ex-ante credit risk taken by different types of lenders in the U.S. syndicated term loan market during the LSAPs period. We find that nonbank lenders, mutual funds and structured-finance vehicles, take higher risk when longer-term interest rates decrease. The results are stronger for mutual funds that charge higher fees. Banks accommodate other lenders’ investment choices by originating riskier loans and selling them off. These results are consistent with “search for yield” by nonbanks and with a risk-taking channel of monetary policy. Over the sample we study, lower longer-term interest rates appear to have only a minimal effect on loan spreads.

An Empirical Analysis of the Risk Taking Channel of Monetary Policy in China—Base on Evidence from Chinese Listed Bank

After financial crisis in 2008, more and more researchers paid attention to not only the expansionary monetary policy but also the relationship between the risk-taking and monetary policy. Borio and Zhu firstly researched on risk-taking channel of monetary policy in 2008. This article firstly reviews some literature about the risk-taking channel of monetary policy, the transmission mechanism and the influencing factors, and then selects the data of 15 representative listed Banks in China from 2007-2016 to do empirical research and draw the following conclusions. First, this article finds evidence that the risk-taking channel of monetary policy is significant in China. Expansionary monetary policy has a positive impact on banks’ risk-taking. Second, macro-economic conditions and the micro characteristics of the bank can influence the transmission of risk-taking channel. Based on that, this article proposes the recommendation that monetary policy should be included in macro-prudential system to strengthen monitoring system of the bank’s risk management. Besides the relationship between counter-cyclical capital regulation and monetary policy control is important.