CentER Discussion Paper Series No. 2007-75
54 Pages Posted: 3 Oct 2007 Last revised: 13 May 2013
Date Written: May 10, 2013
We identify the effects of monetary policy on credit risk-taking with an exhaustive credit register of loan applications and contracts. We separate the changes in the composition of the supply of credit from the concurrent changes in the volume of supply and quality and volume of demand. We employ a two-stage model that analyzes the granting of loan applications in the first stage and loan outcomes for the applications granted in the second stage, and that controls for both observed and unobserved, time-varying, firm and bank heterogeneity through time*firm and time*bank fixed effects. We find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex-ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex-post likelihood of default. A lower long-term interest rate and other relevant macroeconomic variables have no such effects.
Keywords: monetary policy, financial stability, credit risk, credit supply composition, business cycle, bank capital
JEL Classification: E32, E44, E5, G01, G21, G28
Suggested Citation: Suggested Citation
Jiménez, Gabriel and Ongena, Steven and Peydro , Jose-Luis and Saurina Salas, Jesus, Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk-Taking? (May 10, 2013). CentER Discussion Paper Series No. 2007-75; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1018960 or http://dx.doi.org/10.2139/ssrn.1018960