Monetary Policy and Bank Risk Taking

21 Pages Posted: 8 Aug 2010

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Fabián Valencia

International Monetary Fund (IMF)

Date Written: July 1, 2010

Abstract

This paper contributes to the debate by showing that the relationship between the monetary policy stance and bank risk taking is more complex than generally believed. Most of the debate so far has focused on how monetary policy easing can induce greater risk taking through a search for yield or its effects on leverage and asset prices, a view this paper broadly supports. But, at least in the short run, there is also an opposite risk-shifting effect when financial intermediaries operate with limited liability. The balance, then, depends on financial intermediaries’ degree of limited liability and financial health. When the policy rate is low, high-charter-value (well-capitalized) banks increase risk taking; low-charter-value (poorly capitalized) banks do the opposite.

Keywords: monetary policy, banking, leverage, risk

JEL Classification: E52, G21

Suggested Citation

De Nicolo, Gianni and Dell'Ariccia, Giovanni and Laeven, Luc A. and Valencia, Fabian V., Monetary Policy and Bank Risk Taking (July 1, 2010). Available at SSRN: https://ssrn.com/abstract=1654582 or http://dx.doi.org/10.2139/ssrn.1654582

Gianni De Nicolo

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fabian V. Valencia

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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