The trade-off between monetary policy and bank stability

Martien Lamers, Frederik Mergaerts, Elien Meuleman and Rudi Vander Vennet

No 308, Working Paper Research from National Bank of Belgium

Abstract: This paper investigates how monetary policy interventions by the European Central Bank and the Federal Reserve affect the stock market perception of bank systemic risk. In a first step, we identify monetary policy shocks using a structural VAR approach by exploiting the changes of the volatility of these shocks on days on which there are monetary policy announcements. The second step consists of a panel regression analysis, in which we relate monetary policy shocks to market-based measures of bank systemic risk. Our sample includes information on both Euro Area and U.S. listed banks, covering a sample period from October 2008 to December 2015. We condition the impact of the monetary policy shocks on a set of bank-specific variables, thereby allowing for a heterogeneous transmission of monetary policy. We furthermore use the differences between Euro Area core and periphery countries and the additional granularity of U.S. accounting data to assess which channels determine the transmission of monetary policy. Our results indicate that by supporting weaker banks and allowing banks to delay recognizing bad loans, accommodative monetary policy may contribute to the buildup of vulnerabilities in the banking sector and may make an eventual policy tightening more difficult. On the other hand, a continuation of expansionary monetary policy may increase risk-taking incentives by further compressing banks’ net interest margins.

Keywords: banking; monetary policy; systemic risk; identification-through-heteroskedasticity (search for similar items in EconPapers)
JEL-codes: E52 G21 G32 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2016-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: The Tradeoff between Monetary Policy and Bank Stability (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201610-308

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