The Risk‐Taking Channel of Monetary Policy: Exploring All Avenues

Abstract

The literature on the risk‐taking channel of monetary policy grew quickly, leading to scattered evidence. We examine this channel through different angles, exploring detailed information on loan origination and performance. Ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower. Ex post performance is independent of the level of interest rates at origination. Still, loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase. Risk‐taking is stronger among banks with lower capital ratios, suggesting that this channel may be linked to managerial incentives for risk‐shifting.

Bank capital and risk relationship during COVID-19: a cross-country evidence

“…Therefore, the moral hazard hypothesis is supported. Our finding is consistent with the conclusions of Bonfim and Soares' (2018) study in Portugal, Nguyen and Nguyen (2018) research in Vietnam and Jiang and Yuan (2022) research in China. As explained by Jiang and Yuan (2022), capital buffer has a detrimental impact on bank risk-taking, suggesting that adjusting the capital structure can help mitigate the agency problem.…”

“…However, it is important to acknowledge the potential influence of deposit insurance subsidies, as this may introduce some complexity into the relationship between capital and risk adjustments. Limited empirical tests conducted in China and the Euro area have revealed that the risk-taking behavior of well-capitalized banks is comparatively less pronounced than that of undercapitalized banks (Bonfim and Soares, 2018; Delis and Kouretas, 2011; Jiménez et al , 2014). In the event of a bank failure, shareholders in well-capitalized banks tend to bear greater losses, thereby supporting the argument for regulatory measures that curtail banks’ incentives to engage in excessive risk-taking through their capital structure (Buch and DeLong, 2008; Repullo, 2004).…”

Macro‐financial effects of monetary policy easing

“…Adding US banks to the sample, Maddaloni and Peydr o (2011) also find evidence that low short-term interest rates reduce banks' lending standards. Similar results have been reported by more empirical studies, including Jiménez et al (2014) for Spanish banks, Ioannidou et al (2015) for Bolivian banks, Bonfim and Soares (2018) for Portuguese banks, and Abbate and Thaler (2019) for the US banking sector. In contrast, Buch et al (2014) find no substantial evidence in favor of the risk-taking channel.…”

Does the Risk-Taking or Risk-Shifting Channel of Monetary Policy Work in Developing Countries? Evidence From TVP-Var Approach

“…Analyzing the studies on the efficiency of the risk-taking channel, there is a general opinion that the monetary policy has an impact on the financial stability by affecting the risk-taking tendencies of the financial institutions, although not a complete consensus. Some studies have provided evidence in support of the risk-taking channel of monetary policy hypothesis, which assumes that there is a reverse relationship between low interest rates and bank risk-taking and that the monetary policies affect banks' perceptions and attitudes towards risk (Gambacorta, 2009;Tabak et al, 2010;Altunbas et al, 2010;Maddaloni and Peydró, 2011;Delis and Kouretas, 2011;Aklan et al, 2014;Angeloni et al, 2015;Bonfim and Soares, 2018;Adrian et al, 2019). However, other studies such as Drakos et al (2016) As one of the important studies on the subject, Tabak et al (2010), in their study, in which they analysed the risk-taking reactions of the banks for Brazil, have reached to the conclusion that the low interest rates lead to higher credit risk thus supporting the existence of the risk-taking channel.…”

“…In addition, it was revealed that this situation is more apparent for the banks with higher capitals. More recently, Bonfim and Soares (2018) have provided evidence in favour of risk-taking channel of monetary policy. They show that when the policy interest rates are low, financial institutions, the small banks being first, tend to grant more loans to the economic units without credit history.…”