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Monetary policy and systemic risk-taking in the euro area banking sector

Alain Kabundi () and Francisco Nadal De Simone

Economic Modelling, 2020, vol. 91, issue C, 736-758

Abstract: Available empirical evidence on the significance of the (micro) risk-taking channel of monetary policy is not enough to indicate a threat to financial stability. Evidence of risk-taking with systemic risk implications is necessary. Statistical measures that capture systemic risk in all its forms within a structural factor-augmented vector autoregressive model suggest that conventional and unconventional monetary policies have resulted in systemic risk-taking in the euro area banking sector. Systemic risk has taken the form of an increase in the banking sector’s vulnerability via contagion and interconnectedness. Banks’ balance sheets, however, do not account for the full transmission from (micro) risk taking to systemic risk-taking. The main policy implication is that a persistently accommodative monetary policy may drive a monetary authority with a price stability mandate to consider a possible trade-off with financial stability. At a minimum, coordination between monetary and macro-prudential policies requires serious consideration.

Keywords: Monetary policy; Systemic risk; Financial stability; Non-linearities; Structural FAVAR (search for similar items in EconPapers)
JEL-codes: C30 C38 E44 E52 G1 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2019.10.020

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