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Monetary and Prudential Policy Coordination: impact on Bank's Risk-Taking

Olivier Bruno and Melchisedek Joslem Ngambou Djatche

No 2020-24, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: This paper models monetary policy's transmission to bank risk in presence of a capital requirement ratio. We show that the impact of a change in monetary policy rate on bank's risk level is not independent from the strength of the capital requirement ratio. A monetary easing, as well as a monetary contraction, may lead bank to take more risk according to some effecs related to the risk sensitivity of its intermediation margin and risk sensitivity of the prudential tool. We show that the combination of monetary policy with prudential policy has different outcomes in terms of financial stability and expected cost of bank failure.

Keywords: Monetary policy; prudential policy; financial stability; bank's risktaking; partial equilibrium model (search for similar items in EconPapers)
JEL-codes: E43 E52 E61 G01 G21 G28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:gre:wpaper:2020-24

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