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Bank Leverage and Monetary Policy's Risk-Taking Channel : Evidence from the United States

Author/Editor: Giovanni Dell'Ariccia | Luc Laeven | Gustavo Suarez
Authorized for Distribution: June 6, 2013
Electronic Access: Free Full Text (PDF file size is 954KB)
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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 present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that 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. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
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Series: Working Paper No. 13/143
Subject(s): Banking sector | United States | Monetary policy | Financial stability | Economic models
    Published:   June 6, 2013        
    ISBN/ISSN:   9781484381137/1018-5941   Format:   Paper
    Stock No:   WPIEA2013143   Pages:   41
    Price:   US$18.00
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