The Risk-Taking Channel of Monetary Policy – Exploring All Avenues

Journal of Money Credit and Banking, forthcoming.

36 Pages Posted: 21 Oct 2014 Last revised: 2 Apr 2018

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Carla Soares

Bank of Portugal

Date Written: August 10, 2017

Abstract

It is well established that when monetary policy is accommodative, banks grant more credit. However, only recently has the quality of credit granted been given attention. This literature on the so-called risk-taking channel of monetary policy has been growing quickly, leading to scattered evidence. In this paper we examine through different angles how this channel works. We explore detailed bank and borrower information to look at loan origination and performance over time. We find that ex-ante riskier borrowers have more access to bank funding when interest rates are lower at the extensive margin. Ex-post, overall performance of bank loans is independent of the level of interest rates prevailing when loans were granted. Still, loans granted in periods of low and stable interest rates show higher default rates once interest rates start to increase. Risk-taking behaviors are more prevalent among banks with lower capital ratios, thus suggesting that they may be anchored to managerial incentives for risk-shifting.

Keywords: risk-taking channel, monetary policy transmission, credit risk

JEL Classification: E44, E5, G21

Suggested Citation

Bonfim, Diana and Soares, Carla, The Risk-Taking Channel of Monetary Policy – Exploring All Avenues (August 10, 2017). Journal of Money Credit and Banking, forthcoming.. Available at SSRN: https://ssrn.com/abstract=2512244 or http://dx.doi.org/10.2139/ssrn.2512244

Diana Bonfim (Contact Author)

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Carla Soares

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

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