Monetary Policy Uncertainty and Bank Credit Allocation

Fatih Altunok, Yavuz Arslan and Steven Ongena

No 22050, CEPR Discussion Papers from Centre for Economic Policy Research

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 option implied 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)
Date: 2026-10
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