Does monetary policy influence banks’ risk weights under the internal ratings-based approach?

Simona Malovana, Dominika Kolcunová and Václav Brož

Economic Systems, 2019, vol. 43, issue 2, -

Abstract: This paper studies the extent to which monetary policy may affect banks’ perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we empirically analyze the effect of different monetary policy variables on banks’ risk weights for credit risk. We present robust evidence of a strong, statistically significant relationship between monetary policy easing and lower implicit risk weights of banks using the internal ratings-based approach. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. The presented findings have important implications for the prudential authority, which should be aware of the possible side effects of monetary policy on how banks measure risk.

Keywords: Banks; Financial stability; Internal ratings-based approach; Monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 G28 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:43:y:2019:i:2:10

DOI: 10.1016/j.ecosys.2018.10.003

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