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Risk Taking Channel of Monetary Policy: A Review of the Evidence and Some Preliminary Results for India

Sanjukta Sarkar () and Rudra Sensarma
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Sanjukta Sarkar: Indian Institute of Management Kozhikode

No 250, Working papers from Indian Institute of Management Kozhikode

Abstract: Some recent papers have studied the link between the stance of monetary policy and the risktaking behavior of banks. Loose monetary policy can encourage banks to reach for yield, which will increase their share of risky assets and also induces banks to take more risks on account of a rise in asset values. On the funding side, loose monetary policy increases incentives to use more short term funding. This paper provides a comprehensive review of the evidence on the risk taking channel of monetary transmission and empirically examines the existence of the risk taking channel in Indian banking. The paper’s novelty also lies in the fact that it incorporates the role of ownership and empirically tests the response of banks in terms of a wide array of risks,i.e., asset, default and market risks in the face of easy and tight monetary stances adopted by the central bank.

Keywords: Banks; Risk; Monetary Policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2017-05
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