Bank risk-taking and impaired monetarypolicy transmission

Philipp J. Koenig and Eva Schliephake

No 42/2021, Discussion Papers from Deutsche Bundesbank

Abstract: We consider a standard banking model with agency frictions to simultaneously studythe weakening and reversal of monetary transmission and banks' risk-taking in alow-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks' net worth. The pass-throughto deposit rates, the level of excess reserves and the extent of the agency problembetween banks and depositors are crucial determinants of monetary transmission.If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policyrates below the reversal rate further interest rate reductions lead to a disproportionalincrease in risk-taking and a contraction in loan supply.

Keywords: Monetary policy; Bank lending; Risk-taking channel; Reversal rate (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:422021

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