Heterogeneity in the Bank Risk-Taking Channel of Monetary Policy: Empirical Evidence of U.S. Bank Holding Companies

55 Pages Posted: 3 Jul 2016 Last revised: 31 Jul 2017

Date Written: July 1, 2016

Abstract

In this study, I analyze the heterogeneous dynamics of the bank risk-taking channel of monetary policy under different business models before the recent financial crisis in the U.S. I find that banks' asset-side risk-taking in a low interest rate environment exhibits heterogeneity across different bank business models. In addition, I find that the heterogeneity lies in the behavior of banks as yield-oriented investors by investing in the non-trading account securities in search for yield. Moreover, banks respond asymmetrically to expansionary and contractionary monetary policy. Although monetary policy is not neutral to the financial stability of the banking sector, the lean-against-the-wind type of monetary policy should be carefully applied due to the heterogeneity and asymmetry in the risk-taking channel.

Keywords: Universal bank, Search for yield, Risk-taking channel of monetary policy

JEL Classification: G21, G24, G29, E52

Suggested Citation

Park, Kyounghoon, Heterogeneity in the Bank Risk-Taking Channel of Monetary Policy: Empirical Evidence of U.S. Bank Holding Companies (July 1, 2016). Available at SSRN: https://ssrn.com/abstract=2803079 or http://dx.doi.org/10.2139/ssrn.2803079

Kyounghoon Park (Contact Author)

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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