Monetary policy, funding cost and banks’ risk-taking: evidence from the USA

Constantin Bürgi and Bo Jiang ()
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Bo Jiang: Xi’an Jiaotong-Liverpool University

Empirical Economics, 2023, vol. 65, issue 3, No 3, 1129-1148

Abstract: Abstract How much deposits and equity a bank has influences how a banks’ lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We show in a value-at-risk RTC model that the lending for banks with relatively more equity and non-interest-bearing deposits should respond less to monetary policy tightening. This suggests that non-interest-bearing deposits act as “pseudo capital.” In a panel of US banks, we find strong evidence in support of our model for various risk measures.

Keywords: Bank lending; Deposits; Value-at-risk; Pseudo capital (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-023-02384-z

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