Risk Taking and Interest Rates: Evidence from Decades in the Global Syndicated Loan Market
48 Pages Posted: 9 Mar 2017
Date Written: January 2017
We study how low interest rates in the United States affect risk taking in the market of cross-border leveraged corporate loans. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of a cross-border spillover effect of monetary policy. We find that before the crisis, lenders made ex-ante riskier loans to non-U.S. borrowers in response to a decline in short-term U.S. interest rates, and, after it, in response to a decline in longer-term U.S. interest rates. Economic uncertainty and risk appetite 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: Interest rates on loans, Loans, Credit risk, United States, Monetary policy, Spillovers, Regression analysis, Syndicated loans, risk taking, monetary policy, international spillovers
JEL Classification: E44, E52, F30, F42, G15, G30
Suggested Citation: Suggested Citation