Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States
IMF Working Papers, June 6, 2013
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Bibliographic details
- Authors: Giovanni Dell'Ariccia, Luc Laeven, Gustavo Suarez
- Published: June 6, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484381137.001
Summary
- Presents evidence of a risk-taking channel of monetary policy for the U.S. banking system.
- Uses confidential data on the internal ratings of U.S. banks on loans to businesses from the Federal Reserve’s survey of terms of business lending.
- Sample period: 1997 to 2011.
- Main result: Ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates.
- The negative association is less pronounced for:
- banks with relatively low capital, and
- periods when banks’ capital erodes, such as episodes of financial and economic distress.
- Concludes that monetary policy affects the riskiness of banks and financial stability more generally.
Data and Methodology
- Data source: confidential internal ratings of U.S. banks on business loans from the Federal Reserve’s survey of terms of business lending.
- Time coverage: 1997 to 2011.
- Outcome measure: risk rating of the bank’s loan portfolio (ex-ante risk taking).
- Policy variable: changes in short-term policy interest rates.
Key Findings
- Ex-ante bank risk taking is negatively associated with increases in short-term policy interest rates.
- The relationship between monetary policy tightening and reduced ex-ante risk taking:
- Is weaker for banks with relatively low capital.
- Is weaker during periods when banks’ capital erodes (episodes of financial and economic distress).
Implications for Policy and Financial Stability
- Results contribute to the debate on the role of monetary policy in financial stability.
- Suggests that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
- Policy considerations implied by the findings:
- Monetary policy may influence banks’ risk-taking incentives and thus interact with macroprudential and supervisory frameworks.
- Capital position matters for how banks respond to policy rate changes; capital erosion periods may blunt the risk-taking channel.