Leverage and Risk-Taking Channel of Monetary Policy: Evidence from the Euro Area Banking Industry

25 Pages Posted: 10 Feb 2020

Date Written: January 23, 2020

Abstract

We present evidence for the euro area of a risk-taking channel of monetary policy induced by a low interest rate environment in the aftermath of the financial crisis. Specifically, our dataset covers the period 2009–2017 and analyzes the interdependencies between loan risk, interest rates, and the degree of leverage in banks’ balance sheets. Based on dynamic panel techniques, we find that loan risk (measured ex-ante and ex-post) is negatively associated with variations in interest rates. This negative relationship is most pronounced for banks with relatively high levels of leverage, which is consistent with a search for yield effect. We show that bank liquidity and industry concentration both influence the intensity of the search for yield effect. Eventually, we identify nonlinearities depending on the level of bank capitalization.

Keywords: bank risk, monetary policy transmission, leverage, euro area

JEL Classification: E43, E52, G21, G28

Suggested Citation

De Menna, Bruno, Leverage and Risk-Taking Channel of Monetary Policy: Evidence from the Euro Area Banking Industry (January 23, 2020). Available at SSRN: https://ssrn.com/abstract=3524518 or http://dx.doi.org/10.2139/ssrn.3524518

Bruno De Menna (Contact Author)

University of Toulouse ( email )

Manufacture des Tabacs, 21 allée de Brienne
Toulouse, Haute-Garonne 31042
France

HOME PAGE: http://lereps.sciencespo-toulouse.fr/de-menna-bruno

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