Monetary Policy and Risk Taking

SAFE Working Paper No. 8

41 Pages Posted: 9 Mar 2013

See all articles by Ignazio Angeloni

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations

Ester Faia

Goethe University Frankfurt; Kiel Institute for the World Economy; University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Marco Lo Duca

European Central Bank (ECB)

Date Written: January 1, 2013

Abstract

We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel — monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.

Keywords: bank runs, risk taking, monetary policy

JEL Classification: E5, G2

Suggested Citation

Angeloni, Ignazio and Faia, Ester and Lo Duca, Marco, Monetary Policy and Risk Taking (January 1, 2013). SAFE Working Paper No. 8. Available at SSRN: https://ssrn.com/abstract=2230335 or http://dx.doi.org/10.2139/ssrn.2230335

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Kiel Institute for the World Economy

P.O. Box 4309
Kiel, D-24100
Germany

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

Marco Lo Duca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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