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The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

Van Dan Dang and Van Cuong Dang

Research in International Business and Finance, 2020, vol. 54, issue C

Abstract: The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.

Keywords: Bank performance; Bank risk-taking channel; Monetary policy; Multiple-tool regime (search for similar items in EconPapers)
JEL-codes: E52 G21 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ribaf.2020.101301

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