Excessive Bank Risk Taking and Monetary Policy
IMF Singapore Regional Training Institute
De Nederlandsche Bank - Research Department
August 13, 2012
ECB Working Paper No. 1457
Why should monetary policy 'lean against the wind'? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission.
Number of Pages in PDF File: 34
Keywords: macroprudential, leverage, supervision, monetary transmission
JEL Classification: E43, E52, E61, G01, G21, G28working papers series
Date posted: August 20, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.312 seconds