In search for yield? Survey-based evidence on bank risk taking

Abstract

There is growing consensus that the conduct of monetary policy can have an impact on stability through the risk-taking incentives of banks. Falling interest rates might induce a "search for yield" and generate incentives to invest into risky activities. This paper provides evidence on the link between monetary policy, commercial property prices, and bank risk taking. We use a factor-augmented vector autoregressive model (FAVAR) for the U.S. for the period 1997-2008. We include standard macroeconomic indicators and factors summarizing information provided in the Federal Reserve's Survey of Terms of Business Lending. These data allow modeling the reactions of banks' new lending volumes and prices as well as the riskiness of new loans. We do not find evidence for increased risk taking for the entire banking system after a monetary policy loosening or an unexpected increase in property prices. This masks, however, important differences across banking groups. Small domestic banks increase their exposure to risk, foreign banks lower risk, and large domestic banks do not change their risk exposure.

Shareholder diversification and bank risk-taking

“…The empirical evidence is mixed. On the one hand, a number of studies using bank-level data show that foreign banks are in general more conservative than domestic ones having higher risk-based capital ratios (Crystal et al, 2002) and lower distance to default (Buch et al, 2011;Drakos et al, in press). They tend to ''cherry-pick'', i.e.…”

What is the effect of unconventional monetary policy on bank performance?

“…It does not come as a surprise, therefore, that a lot of emphasis has been placed by academics and policy makers alike on understanding the impact of unconventional monetary policy (Joyce et al, 2012;Miles, 2014;Svensson, 2014). Along these lines, there has been a growing literature that examines the effect of interest rates on the risk-taking of banks (Delis et al, 2011;Altunbas et al, 2012;Fungacova et al, 2014;Buch et al, 2014;Ioannidou et al, 2015). This paper tries to bridge a gap in the existing literature by examining the underlying relationship between the unconventional monetary policies (UMPs), as measured by central bank's assets and excess reserves, and the performance of the US commercial and saving banks controlling for bankspecific and country-level variables.…”

What slice of the pie? The corporate bond market boom in emerging economies

“…Section 7 concludes. 7 The search for yield would normally drive cross-border bank loans as well (Goldberg, 2009), conditional on global banks' capital structures (Dell'Ariccia et al, 2014, Buch et al, 2014. The post-crisis period, however, was characterized by weak bank balance sheets, global bank deleveraging amid tighter home regulations.…”