Monetary Policy and Systemic Risk-taking in the Euro Area Banking Sector

41 Pages Posted: 25 Jun 2019

See all articles by Alain Ntumba Kabundi

Alain Ntumba Kabundi

World Bank

Francisco Nadal De Simone

Universite du Luxembourg - Luxembourg School of Finance; Sacred Heart University

Date Written: June 19, 2019

Abstract

Available empirical evidence on the significance of the (micro) risk-taking channel of monetary policy is not sufficient to indicate a threat to financial stability. This research has the objective of determining whether conventional and unconventional monetary policies have resulted in systemic risk-taking. To that end, it uses statistical measures that capture systemic risk in the banking sector of the euro area in all its forms allowing for the time-varying non-linearities and feedback effects typical of financial markets. The methodology is a structural factor-augmented vector autoregressive (FAVAR) model. The main result is that there is systemic risk-taking in the euro area banking sector. It takes the form of an increase in the banking sector’s vulnerability via contagion and interconnectedness. Banks’ balance sheets, however, do not account for the full transmission from (micro) risk taking to systemic risk-taking confirming the importance of accounting for time-varying non-linearities and feedback effects. The main policy implication is that persistently accommodative monetary policy geared toward preserving price stability may face a trade-off with financial stability. In that case, monetary policy will require coordination with macro-prudential policy.

Keywords: monetary policy, systemic risk, financial stability, non-linearities, structural FAVAR

JEL Classification: E44, E52, C30, C38, G1

Suggested Citation

Kabundi, Alain Ntumba and Nadal De Simone, Francisco, Monetary Policy and Systemic Risk-taking in the Euro Area Banking Sector (June 19, 2019). Available at SSRN: https://ssrn.com/abstract=3406536 or http://dx.doi.org/10.2139/ssrn.3406536

Alain Ntumba Kabundi

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Francisco Nadal De Simone (Contact Author)

Universite du Luxembourg - Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

HOME PAGE: http://https://wwwfr.uni.lu/fdef/luxembourg_school_of_finance

Sacred Heart University ( email )

7, rue Alcide de Gasperi
Luxembourg, CT L-2981
Luxembourg

HOME PAGE: http://www.shu.lu/

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