Lending Standards, Bank Risk-Taking, and Monetary Policy

Using a unique dataset of the Euro-area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards for household and corporate loans. This softening--especially for mortgages--is amplified by securitization activity, weak supervision for bank capital, and low monetary policy rates for an extended period. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor rule residuals experienced a worse economic performance afterward. These results help shed light on the origins of the crisis and have important policy implications. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.

International Spillovers from US Forward Guidance to Equity Markets

When is it Less Costly for Risky Firms Firms to Borrow? Evidence from the Bank Risk-Taking Channel of Monetary Policy

The Risk-Taking Channel of Monetary Policy Exploring All Avenues

Monetary policy and bank risk-taking: Evidence from the corporate loan market

ABSTRACTThis paper examines the role of unconventional monetary policy announcements on risk aversion – as proxied by the variance premium – by using panel data analysis. The objective of this empirical analysis is to investigate the risk-taking channel of monetary policy for the major European and U.S. equity markets by studying the impact that the announcements of an unconventional monetary policy has on market uncertainty and risk perception. By measuring the difference between risk-neutral and realised and conditional variance, we estimate the variance premium, which captures the impact that pricing concerns have on the prices of options. The empirical analysis indicates that easing monetary policies can significantly reduce the variance premium. In addition, we examine the risk premium structure across markets to determine the potential differences in investors’ risk aversion.

Systemic risk has certain properties that make it behave as a complex system, one of which is its nonlinearity.The objective of this paper is to empirically address the systemic risktaking channel of monetary policy from this perspective using the U.S. case and the TVP-VAR model with Structural Factor Augmented (SFA-TVP-VAR).In order to obtain robust results, I estimate this model with two different metrics of the monetary policy stance, with different parameters and priors in each case.Considering the remaining system variables as latent variables, I document evidence of a complex channel: I find that the relationship between monetary policy stance and systemic risk-taking is non-linear and adaptive to economic conditions.Specifically, the posterior estimation shows that the monetary policy maintains an inverse relationship with systemic risk-taking in the long run, indicating that a loose stance increases systemic risk; however, in the short run, in earlier periods and during a financial crisis, a restrictive shock of monetary policy, instead of reducing systemic risktaking, increases it. RESUMENEl riesgo sistmico tiene ciertas propiedades que lo hacen un sistema complejo, una de ellas es la no linealidad.El objetivo de este trabajo es abordar empricamente la existencia del canal de toma de

This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk, since they reduce market uncertainty and funding risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response.

Recent events have highlighted the potential importance of nonlinear efiects of flscal variables (notably debt and deflcits) on interest rates: While in times when government solvency is not a concern the standard crowding-out efiects are of moderate magnitude, in times when default risk becomes an issue the interest rate efiects can become very large. This paper provides new evidence on the magnitude of these efiects. For the case when default risk is not a concern, it uses an arbitrage-free term structure model to estimate the dynamic efiects of flscal policy shocks on interest rates along the entire maturity spectrum. For the case when default risk becomes a concern (thereby violating a central assumption of the term structure model), I present evidence based on EMU government bond spread regressions on time-varying efiects of national flscal policies on spreads as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of flscal policy. JEL classiflcation: E6, H6.

Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards -- a commonly-used indicator of changes in credit supply conditions -- into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads -- where the latter is instrumented with our bank-level loan-supply shifter -- yields the semi-elasticity of loan demand between 1.0 and 1.5b.

This paper investigated the effect of bank size on the relationship between monetary policy and capital adequacy of listed deposit money banks in Nigeria for the period of 2015-2024. The thirteen 13 listed Deposit Money Banks (DMBs) on the Nigerian Exchange (NGX) out of the twenty-four 24 licensed (DMBs) were used for this study. Specifically, the study adopted multiple regression techniques as a tool of analysis and data were collected from secondary source through the Central Bank of Nigeria statistical bulletins; annual reports and account of the sampled banks. Capital adequacy is proxied by the Capital Adequacy Ratio (CAR), while monetary policy is measured using the Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR). Bank size is captured as the natural logarithm of total assets, and interaction terms are employed to test the moderating effect of bank size. The findings reveal that contractionary monetary policy exerts a negative and statistically significant effect on banks' capital adequacy, indicating that higher policy rates and reserve requirements weaken banks' ability to sustain regulatory capital buffers. The findings further show that bank size has a positive and significant influence on capital adequacy, with larger banks maintaining stronger capital positions than smaller banks. In addition, the interaction results demonstrate that bank size significantly moderates the relationship between monetary policy and capital adequacy, such that the adverse effects of monetary tightening are less pronounced for larger banks. The study concludes that the impact of monetary policy on bank capital adequacy in Nigeria is heterogeneous and strongly conditioned by bank size. These findings underscore the need for size-sensitive monetary and prudential policy frameworks that balance macroeconomic stabilization objectives with banking sector resilience. Keywords: Bank size, Monetary policy, Capital adequacy, Deposit money banks; Nigeria

This study explains Turkey’s stance on policy rates throughout the 2010s and the reasons behind its recent monetary policy adjustments. Policy rate is a crucial tool for central banks which manages the economy, influences inflation, economic growth and employment. It is measured by basis points which is is the terminology to denote changes in interest rates. Turkey maintained an expansionary monetary policy throughout the 2010s to promote economic growth, and combat unemployment, maintaining relatively low interest rates. However, Turkey then shifted to a contractionary monetary policy in 2023 after the increasing inflation, currency devaluation and economic imbalances. This study also explains how the recent leadership changes in the Central Bank of Turkey have marked a new phase in the country’s monetary policy direction. In 2023, Hafize Gaye Erkan became the first female governor of the Central Bank, initiating a shift from an expansionary stance to an aggressive increase in policy rates. During her time in office, policy rates were raised significantly to address high inflation and currency instability, marking a clear change from earlier approaches. The behavior was then maintained by her successor, Fatih Karahan, by raising the policy rate by 50.0\% in March 2024. The paper highlights the significant effects of policy rate changes on Turkey's economy. It discusses their role in managing inflation, which hit record highs in 2023, and their impact on economic stability, investor trust, and financial markets. This paper also examines how external factors, like U.S. Federal Reserve decisions, affect Turkey’s monetary policy, especially regarding capital flows and exchange rates.

This study examines the role of bank capital in the transmission of monetary policy, considering the bank lending channel (BLC) and financial development. Analyzing bank-level data from nine countries during 2007-2021 with GMM method, the study finds that well-capitalized banks are better positioned to expand loan supply and withstand adverse shocks. However, behavioral patterns differ between developed and ASEAN countries. In developed nations, policy rate changes have inconclusive effects on loan growth, while profitable banks and inflation drive credit expansion. In ASEAN countries, policy rate increases are associated with loan growth, reflecting favorable economic conditions. Financial development impacts credit expansion differently in developed and ASEAN countries, with improved financial systems mitigating shocks in ASEAN. These findings emphasize the importance of bank capital and the need for policymakers to consider bank capital and financial development in designing effective monetary policies.

In the literature, the question of central banks’ responsibility for triggering crises is raised when sustainable low interest rates lead to excessive banks’ risk exposures. However, such portfolio choices mainly depend on the various returns of assets and on the official interest rate, taking into account that the bank lending channel is affected by the bank capital channel. On the basis of a simple theoretical model including a solvency ratio, we show that during recessions a credit rationing is observed together with a flight to quality; during expansions monetary policy can induce both a fall in credit activity and an increase in financial instability. Then, regulatory capital arbitrages appear and still weaken productive loans. Conclusions can be drawn in terms of prudential policy, as the central bank may be powerless face to banking strategies if the regulatory framework is procyclical.