Monetary Policy Uncertainty and Bank Credit Allocation

Fatih Altunok, Yavuz Arslan and Steven Ongena
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Fatih Altunok: Central Bank of the Republic of Turkey
Yavuz Arslan: University of Liverpool Management School
Steven Ongena: University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

No 26-75, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We analyze how monetary policy uncertainty (MPU) affects bank credit allocation. First, we develop a theoretical model in which MPU consumes banks' risk-bearing capacity. Higher MPU therefore curbs risky lending, most strongly at less capitalized banks. Second, we test this prediction across U.S. credit markets using FOMC-announcement changes in optionimplied rate uncertainty, controlling for the monetary policy stance. In syndicated lending, a one standard deviation increase in MPU widens the gap between high-and low-capital banks in lending to riskier relative to safer borrowers by 1.65 percent. Small business and mortgage originations show similar patterns, consistent with this mechanism.

Keywords: Monetary policy; uncertainty; bank capital; credit allocation (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2675

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