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

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

No 25-42, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper shows that monetary policy influences bank credit policy through the risk-taking channel. Using option prices on Federal Open Market Committee (FOMC) announcement days, we measure the impact of monetary policy on bank equity tail risks and link them to loan-level regulatory data. Banks that experience a decline in tail risk lend more to riskier firms and ease loan terms in the three weeks after the FOMC announcement. These effects are concentrated among banks with short-term compensation structures and in competitive credit markets. Our results isolate the impact of bank risk-taking in loan supply from confounding forces such as endogenous credit demand and highlight how institutional frictions mediate the risk-taking channel of monetary policy

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)
Pages: 65
Date: 2025-12-31
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:102288

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DOI: 10.21799/frbp.wp.2025.42

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