Monetary Policy and Bank Risk-Taking: Evidence from the Corporate Loan Market

50 Pages Posted: 25 Jan 2012 Last revised: 31 Jul 2018

See all articles by Teodora Paligorova

Teodora Paligorova

Board of Governors of the Federal Reserve System

João A. C. Santos

Federal Reserve Bank of New York

Date Written: December 7, 2013

Abstract

Our study of banks' corporate loan pricing policies in the United States over the past two decades shows that the loan spreads between riskier and safer borrowers decrease in periods of easy compared to periods of tight monetary policy. This interest rate discount is robust to borrower-, loan-, and bank-specific factors, macroeconomic factors and various types of unobserved heterogeneity at the bank and firm levels. Using individual bank information about lending standards from the Senior Loan Officers Opinion Survey (SLOOS), we unveil evidence that the interest rate discount for riskier borrowers in periods of easy monetary policy is prevalent among banks with greater risk appetite. This finding constitutes solid evidence in support of the bank risk-taking channel of monetary policy.

Keywords: Risk-taking channel, monetary policy, loan spreads

JEL Classification: G21

Suggested Citation

Paligorova, Teodora and Santos, João A. C., Monetary Policy and Bank Risk-Taking: Evidence from the Corporate Loan Market (December 7, 2013). Journal of Financial Intermediation, Vol. 30, pp. 35-49, 2017, Available at SSRN: https://ssrn.com/abstract=1991471 or http://dx.doi.org/10.2139/ssrn.1991471

Teodora Paligorova (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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