The Impacts of Monetary Policy on Banks' Loan Portfolio Risk-taking

30 Pages Posted: 9 Aug 2021

See all articles by Luiz F.S. Adão

Luiz F.S. Adão

Universidade de Brasilia - Department of Economics

Douglas Silveira

University of Alberta - Department of Economics

Regis Augusto Ely

Universidade de Brasília (UnB) - Department of Economics

Daniel O. Cajueiro

University of Brasilia - Department of Economics

Date Written: August 3, 2021

Abstract

Using an agent-based model, we investigate how monetary policy affects banks' risk-taking in terms of the profile of their lending to real sector firms. Our agent-based model considers five types of agents: banks, depositors, the Central Bank, firms, and the clearinghouse. While banks and depositors are bounded-rational agents with adaptive strategies, the other players' behaviors are used as a reference to understand how these main agents respond strategically to different incentives and situations. Some of our findings recover stylized facts available in the literature: (1) when the monetary policy eases, there is an increase of real sector loans, particularly for riskier clients; (2) the interbank market plays a fundamental role in banks' liquidity management; (3) banks avoid borrowing resources from the Central Bank; (4) when the monetary policy is restrictive, banks increase the level of capital buffers and the Capital Adequacy Ratio (CAR). We also present new insights regarding the relationship between monetary policy stances and bank risk-taking, opening an avenue to investigate the banks' learning process dynamics. Finally, we show that banks tend to grow when the monetary policy stance eases.

Keywords: Agent-Based Model, Banking, Loan Portfolio, Monetary Policy, Risk

JEL Classification: G21, G28, E58

Suggested Citation

Adão, Luiz F.S. and Silveira, Douglas and Ely, Regis Augusto and Cajueiro, Daniel O., The Impacts of Monetary Policy on Banks' Loan Portfolio Risk-taking (August 3, 2021). Available at SSRN: https://ssrn.com/abstract=3898624 or http://dx.doi.org/10.2139/ssrn.3898624

Luiz F.S. Adão

Universidade de Brasilia - Department of Economics

Campus Universitario Darcy Ribeiro
CASA 04
Brasília, 70331768
Brazil

Douglas Silveira

University of Alberta - Department of Economics ( email )

Edmonton, Alberta T6G 2R6
Canada

Regis Augusto Ely

Universidade de Brasília (UnB) - Department of Economics ( email )

Brasilia, DF 70910-900
Brazil

Daniel O. Cajueiro (Contact Author)

University of Brasilia - Department of Economics ( email )

Brazil

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