Monetary Policy, Risk-Taking and Pricing: Evidence from a Quasi-Natural Experiment
CentER, European Banking Center (EBC), Tilburg University
Tilburg University - CentER, European Banking Center (EBC); Centre for Economic Policy Research (CEPR)
Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics
September 1, 2009
European Banking Center Discussion Paper No. 2009-04S
CentER Discussion Paper Series No. 2009-31S
We analyze the impact of monetary policy rates on loan risk-taking and pricing. An excellent setting for identification is Bolivia between 1999 and 2003, where the US federal funds rate is the appropriate measure of monetary policy and exogenous to Bolivian economic conditions. We find robust evidence that a decrease in the funds rate spurs the granting of new loans: (1) with a higher probability of default, (2) to non-performing or lowly rated borrowers, (3) at a lower interest rate spread, and (4) especially by banks with more agency problems, suggesting a link from low policy rates to excessive risk-taking.
Number of Pages in PDF File: 45
Keywords: low federal funds rate, lending standards, bank agency problems, credit and liquidity risk, subprime borrowers
JEL Classification: E44, G21, L14working papers series
Date posted: May 26, 2009 ; Last revised: November 9, 2009
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