Unconventional Monetary Policy and Bank Risk-Taking in the Euro Area

Joerg Schmidt ()
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Joerg Schmidt: Justus-Liebig-Universitat Giessen

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper studies risk-taking by European banks. After an overview about the banking landscape in the euro area, we construct a measure of risk-taking which relates changes in three month ahead expected credit standards for several non-financial private sector categories to the risk of the macroeconomic environment banks operate in. With this approach we want to tackle the question if credit standards react disproportionately strong to changes in the monetary policy stance. We use an estimated bond market based measure to assess the overall riskiness prevailing in the economy. With this approach we want to shed some light on whether banks act excessively risky and provide new evidence as well as an alternative assessment on the amplifying nature of the risk-taking channel of monetary policy. We put our measure into a VAR model in which structural innovations are identified with sign restrictions. The key outcomes of this paper are the following: expansionary monetary policy shocks decrease our measure of risk-taking. Decreases in our measure are caused by disproportionately strong reactions in credit standards compared to the overall macroeconomic risk, especially during the recent financial crisis. Disproportionately in the sense that our macroeconomic risk measure is less affected by expansionary monetary policy shocks than credit standards. The credit granting reaction depends on the category: In general, loans to non-financial corporations are less sensitive to monetary policy shocks while mortgages seem to be affected more. We conclude that expansionary monetary policy shifts the portfolio of banks to overall riskier asset holdings.

Keywords: monetary policy; euro area; bank risk-taking; credit standards; sign restrictions VAR (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201824

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