The impact of monetary policy shocks on banks' systemic risk in canada

H. Semih Yildirim () and Mortaza Baky Haskuee ()
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H. Semih Yildirim: York University
Mortaza Baky Haskuee: University of Toronto

Journal of Economics and Finance, 2025, vol. 49, issue 1, No 7, 175 pages

Abstract: Abstract This paper analyzes the impact of monetary policy shocks on systemic risk within Canada’s concentrated banking sector, where a few large institutions hold significant market influence. Utilizing Structural Vector Autoregression (SVAR) and Panel Vector Autoregression (PVAR) models, we evaluate how changes in key monetary policy variables, specifically policy rate adjustments and fluctuations in money supply, affect various systemic risk indicators, including Marginal Expected Shortfall (MES), Long-Run Marginal Expected Shortfall (LRMES), and Conditional Value at Risk (CoVaR). The results reveal that expansionary monetary policy, particularly through increased money supply, temporarily heightens systemic risk as banks leverage added liquidity. This risk-taking behavior aligns with the short-term rise in MES and LRMES, emphasizing how liquidity injections can elevate financial vulnerabilities. Conversely, contractionary monetary policies, such as rate hikes, reduce risk measures like MES and LRMES by encouraging more conservative lending practices, as the higher borrowing costs deter excessive risk-taking. However, contractionary policies may increase credit-related systemic risk, as reflected in metrics like ΔCoVaR, potentially due to increased debt servicing pressures. The results highlight the importance of carefully calibrated monetary policy, to balance economic growth objectives with the imperative of financial stability especially within concentrated banking environments, where institutional interconnectedness amplifies risk propagation.

Keywords: Monetary policy; Bank systemic risk; Structural VAR (SVAR); Canadian banking (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 G21 G32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s12197-024-09700-y

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