Monetary Policy, Credit Risk, and Profitability: The Influence of Relationship Lending on Cooperative Banks' Performance

Bruno de Menna (bruno.de-menna@ut-capitole.fr)
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Bruno de Menna: IEP Toulouse - Sciences Po Toulouse - Institut d'études politiques de Toulouse, LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - UT2J - Université Toulouse - Jean Jaurès - UT - Université de Toulouse - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville

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Abstract: Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold "low-for-long". Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability through higher credit risk when interest rates fall, relationship-based cooperative banks instead increase their capital buffers to ensure credit access to their customers, which mainly comprise small businesses and high-risk firms.

Keywords: Monetary policy; Credit risk; Profitability; Cooperative banks; Relationship lending (search for similar items in EconPapers)
Date: 2021-02-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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