Monetary policy expectations and risk-taking among U.S. banks

David Byrne and Robert Kelly

No 6/RT/19, Research Technical Papers from Central Bank of Ireland

Abstract: We investigate the role that monetary policy plays in influencing the riskiness of bank lending via the “risk-taking channel” of the transmission mechanism. This affects banks’ perception of, and preference for, extendingnewrelatively risky lending. Using data on the lending of US banks to different risk categories of borrowers, we show that unanticipated increases in expected future interest rates, as measured by the term spread, induce banks to increase the riskiness of their lending. They do this both on an intensive margin, decreasing their lending to less risky borrowers in favour of riskier borrowers, and on an extensive margin also. We show that a one percentage point increase in the term spread leads banks to increase the relative share of riskier lending by 12.6 percent. Our results are relevant for understanding the channels of the monetary policy transmission mechanism and for thinking about the linkages between monetary policy and financial stability.

Keywords: Monetary Policy; Risk Taking; Bank Lending (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G21 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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