Systemic Bank Risk and Monetary Policy

Ester Faia and Soeren Karau

No 13456, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and timeseries evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macroprudential policy has a significant role in taming the unintended consequences of monetary policy on systemic risk.

Keywords: Risk-taking channel of monetary policy; Deltacovar; Lrmes; Panel var; Proxy var; Monitoring intensity; Leverage; Macroprudential policy; Policy complementarities (search for similar items in EconPapers)
JEL-codes: E44 E52 G18 G21 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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