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

Lancaster University - Management School; Centre for Economic Policy Research (CEPR)

Steven Ongena

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

Jose-Luis Peydro

Catalan Institution of Research and Advanced Studies (ICREA); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

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 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. Available at SSRN: https://ssrn.com/abstract=1406423 or http://dx.doi.org/10.2139/ssrn.1406423

Vasso Ioannidou (Contact Author)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jose-Luis Peydro

Catalan Institution of Research and Advanced Studies (ICREA) ( email )

P/ Lluis Companys 23
Barcelona, 08010
Spain

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/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=432

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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