The Fed Put and Bank Risk-Taking: Evidence from the Loan Book

Xudong An, Jan Harren, Saket Hegde, Mete Kilic and Rodney Ramcharan

No 12980, CESifo Working Paper Series from CESifo

Abstract: This paper shows that monetary policy changes the risk composition of bank lending by altering the perceived tail risk of bank equity: when FOMC announcements compress the likelihood of costly low-equity states, banks originate riskier commercial and industrial loans. We measure bank-specific tail-risk shocks using equity put option returns and link them to originations in supervisory loan data. The shift toward riskier lending emerges after announcements and extends to lending within existing bank-borrower relationships. Stress-test capital and banks' own reports tying lending standards to risk tolerance corroborate the mechanism. Short-term compensation, earnings pressure, and competition amplify this risk-taking channel.

Keywords: Fed put; risk-taking channel; credit policy; monetary policy; bank equity tail risk (search for similar items in EconPapers)
JEL-codes: E52 G12 G21 (search for similar items in EconPapers)
Date: 2026
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