The risk-taking channel of monetary policy – exploring all avenues

Carla Soares and Diana Bonfim

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: It is well established that when monetary policy is accommodative, banks tend to grant more credit. However, only recently attention was given to the quality of credit granted and, naturally, the risk assumed during those periods. This article makes an empirical contribution to the analysis of the so-called risk-taking channel of monetary policy. We use bank loan level data and different methodologies to test whether banks assume more credit risk when monetary policy interest rates are lower. Our results provide evidence in favor of this channel through different angles. We show that banks, most notably smaller banks, grant more loans to non-financial corporations with recent defaults or without credit history when policy interest rates are lower. We also find that loans granted when interest rates are low are more likely to default in the hiking phase of the interest rate cycle. However, the level of policy interest rates at the moment of loan concession does not seem to be relevant for the ex-post probability of default of the overall loan portfolio.

JEL-codes: E44 E5 G21 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: The Risk‐Taking Channel of Monetary Policy: Exploring All Avenues (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201402

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