Monetary Policy, Risk-Taking and Pricing: Evidence from a Quasi-Natural Experiment

European Banking Center Discussion Paper No. 2009-04S

CentER Discussion Paper Series No. 2009-31S

52 Pages Posted: 26 May 2009 Last revised: 1 Jul 2014

See all articles by Vasso Ioannidou

Vasso Ioannidou

Centre for Economic Policy Research (CEPR); The Business School (formerly Cass)

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: June 30, 2014

Abstract

We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the US. We find that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking we assess collateral coverage, expected returns and risk premia of the newly-granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems.

Keywords: low federal funds rate, lending standards, bank agency problems, credit and liquidity risk, subprime borrowers

JEL Classification: E44, G21, L14

Suggested Citation

Ioannidou, Vasso and Ioannidou, Vasso and Ongena, Steven R. G. and Peydro, Jose-Luis, Monetary Policy, Risk-Taking and Pricing: Evidence from a Quasi-Natural Experiment (June 30, 2014). European Banking Center Discussion Paper No. 2009-04S, CentER Discussion Paper Series No. 2009-31S, Available at SSRN: https://ssrn.com/abstract=1406423 or http://dx.doi.org/10.2139/ssrn.1406423

Vasso Ioannidou (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

The Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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