Systemic Bank Risk and Monetary Policy

Ester Faiaa and Sören Karau
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Ester Faiaa: Goethe University Frankfurt and CEPR
Sören Karau: Deutsche Bundesbank

International Journal of Central Banking, 2021, vol. 17, issue 71, 40

Abstract: The risk-taking channel of monetary policy acquires relevance for macro policymakers only if it affects systemic risk. We find robust evidence that a monetary tightening lowers systemic risk using cross-country and time-series data in a VAR framework for 29 G-SIBs from seven countries, different risk metrics (ΔCoVaR, LRMES), as well as econometric specifications and identification schemes (panel VAR with recursive identification; proxy VARs using external instruments). We then assess implications for policy. First, we find that both U.S. and euro-area monetary policy shocks spill into other countries' systemic risk. Second, we document that macroprudential policy plays a significant role in taming the unintended consequences of monetary policy on systemic risk, particularly so for U.S. policy spillovers.

JEL-codes: E44 E52 G18 G21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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