Monetary Policy, Risk-Taking and Pricing: Evidence from a Quasi-Natural Experiment
CentER Discussion Paper Series No. 2009-31S
52 Pages Posted: 26 May 2009 Last revised: 1 Jul 2014
Date Written: June 30, 2014
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: Suggested Citation