Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Loan Market
45 Pages Posted: 21 Sep 2015 Last revised: 19 Jun 2017
Date Written: July 18, 2015
We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These results are consistent with a "search for yield" by certain types of shadow banks and, to the extent that Federal Reserve policies affected longer-term rates, the results are also consistent with the presence of a risk-taking channel of monetary policy. Finally, we find that longer-term interest rates have only a modest effect on loan spreads.
Keywords: Syndicated loans, Shared National Credit Program, Shadow banking, Zero lower bound, Search for yield, Risk-taking channel of monetary policy
JEL Classification: E43, E44, E52, E58, G11, G20
Suggested Citation: Suggested Citation