Risk Taking and Interest Rates: Evidence from Decades in the Global Syndicated Loan Market

Posted: 15 Jan 2017

See all articles by Lucy Qian Liu

Lucy Qian Liu

International Monetary Fund (IMF)

Viktors Stebunovs

Board of Governors of the Federal Reserve System

Seung Jung Lee

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-01

Abstract

We study how low interest rates in the United States affect risk taking in the market for cross-border corporate loans. Because banks tend to originate these loans with intent to sell to nonbank investors, we examine risk taking by the broad financial system. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of cross-border spillover effects of U.S. monetary policy and highlights the global lending and risk-taking channels. We find that movements in the U.S. interest rates have an important effect on ex-ante credit risk of cross-border corporate loans, though the channels are different in the pre- and post-crisis periods. Before the crisis, banks made ex-ante riskier loans to non-U.S. borrowers in response to a decline in U.S. short-term interest rates, and, after it, banks and nonbanks originated such loans in response to a decline in U.S. longer-term interest rates. Economic uncertainty, risk appetite, and the U.S. dollar exchange rate appear to play a limited role in explaining ex-ante credit risk. Our results highlight the potential policy challenges faced by central banks in affecting credit risk cycles in their own jurisdictions.

Keywords: Syndicated loans, Risk taking, Monetary policy, International spillovers

JEL Classification: E44, E52, F30, F42, G15, G20

Suggested Citation

Liu, Lucy Qian and Stebunovs, Viktors and Lee, Seung Jung, Risk Taking and Interest Rates: Evidence from Decades in the Global Syndicated Loan Market (2017-01). FRB International Finance Discussion Paper No. 1188, Available at SSRN: https://ssrn.com/abstract=2898710 or http://dx.doi.org/10.17016/IFDP.2017.1188

Lucy Qian Liu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Viktors Stebunovs

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Seung Jung Lee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
353
PlumX Metrics