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An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey

Ekin Ozsuca () and Elif Akbostanci ()
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Ekin Ozsuca: Department of Economics, METU
Elif Akbostanci: Department of Economics, METU

No 1208, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: The mechanism by which monetary policy affects financial institutions’ risk perception and/or tolerance has been called the ‘risk-taking channel’ of monetary policy. It has been recently argued that periods of low interest rates due to expansionary monetary policy, might induce an increase in bank risk-appetite and risk-taking behavior. This paper investigates the bank specific characteristics of risk-taking behavior of the Turkish banking sector as well as the existence of risk taking channel of monetary policy in Turkey. Using bank level quarterly data over the period 2002-2012 a dynamic panel model is estimated. Our sample accounts for 53 banks that have been active in Turkey during the period. To deal with the potential endogeneity between risk and bank specific characteristics, which are explanatory variables in our model, the GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998) is used. Four alternative risk measures are used in the analysis; three accounting-based risk indicators and a market-based indicator- Expected Default Frequency. We find evidence that low levels of interest rates have a positive impact on banks’ risk-taking behavior for all the risk measures. Specifically, low short term interest rates reduce the risk of outstanding loans; however short term interest rates below a theoretical benchmark increase risk-taking of banks. This result holds for macroeconomic controls as well. Furthermore, in terms of bank specific characteristics, our analysis suggests that large, liquid and well-capitalized banks are less prone to risk-taking.

Keywords: Monetary policy; Transmission mechanisms; Risk-taking channel; Turkey; Panel Data (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-cba, nep-mac and nep-mon
Date: 2012-12, Revised 2012-12
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http://erc.metu.edu.tr/en/system/files/menu/series12/1208.pdf First version, 2012 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1208

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