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When Is It Less Costly for Risky Firms to Borrow? Evidence from the Bank Risk-Taking Channel of Monetary Policy

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Author Info

  • Teodora Paligorova
  • João A. C. Santos

Abstract

In an investigation of banks’ loan pricing policies in the United States over the past two decades, this study finds supporting evidence for the bank risk-taking channel of monetary policy. We show that banks charge lower spreads when they lend to riskier borrowers relative to the spreads they charge on loans to safer borrowers in periods of low short-term rates compared to periods of high short-term rates. The interest discount that banks offer riskier borrowers when short-term rates are low is robust to borrower-, loan-, and bank-specific factors as well as to macroeconomic factors known to affect loan rates. The discount is also robust to bank-firm fixed effects. Finally, our tests that build on the micro information banks provide on their lending standards in the Senior Loan Officers Opinion Survey suggest the interest rate discount that riskier borrowers receive when short-term rates are low is bank driven.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 12-10.

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Length: 54 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bca:bocawp:12-10

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Keywords: Financial institutions; Monetary policy framework;

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References

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  4. Maddaloni, Angela & Peydró, José-Luis, 2010. "Bank risk-taking, securitization, supervision and low interest rates: Evidence from the euro area and the U.S. lending standards," Working Paper Series 1248, European Central Bank.
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  17. Gabriel Jiménez & Steven Ongena & José Luis Peydró & Jesús Saurina, 2009. "Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking?," Banco de Espa�a Working Papers 0833, Banco de Espa�a.
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Cited by:
  1. Itai Agur & Maria Demertzis, 2011. ""Leaning Against the Wind" and the Timing of Monetary Pollicy," DNB Working Papers 303, Netherlands Central Bank, Research Department.
  2. Diana Bonfim & Carla Soares, 2013. "Is there a risk-taking channel of monetary policy in Portugal?," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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