How to order
IMF Publications

Working Papers in full text
2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 All


Other research-related activities and publications of the IMF can be found at IMF Research

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile



Monetary Policy, Leverage, and Bank Risk-Taking

Author/Editor: Dell'Ariccia, Giovanni | Laeven, Luc | Marquez, Robert
Authorized for Distribution: December 1, 2010
Electronic Access: Free Full Text (PDF file size is 498KB)
Use the free Adobe Acrobat Reader to view this PDF file.
 
Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.
 
Order a print copy
Series: Working Paper No. 10/276
Subject(s): Banks | Capital | Central bank policy | Credit risk | Economic models | Financial intermediation | Monetary policy | Risk management
Author's keyword(s): Monetary policy | leverage | risk taking | banking crises
 
English  
    Published:   December 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010276   Pages:   36
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
Please address any questions about this title to publications@imf.org.