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Monetary policy expectations and risk-taking among U.S. banks

Author

Listed:
  • Byrne, David

    (Central Bank of Ireland)

  • Kelly, Robert

    (Central Bank of Ireland)

Abstract

We investigate the role that monetary policy plays in influencing the riskiness of bank lending via the “risk-taking channel” of the transmission mechanism. This affects banks’ perception of, and preference for, extendingnewrelatively risky lending. Using data on the lending of US banks to different risk categories of borrowers, we show that unanticipated increases in expected future interest rates, as measured by the term spread, induce banks to increase the riskiness of their lending. They do this both on an intensive margin, decreasing their lending to less risky borrowers in favour of riskier borrowers, and on an extensive margin also. We show that a one percentage point increase in the term spread leads banks to increase the relative share of riskier lending by 12.6 percent. Our results are relevant for understanding the channels of the monetary policy transmission mechanism and for thinking about the linkages between monetary policy and financial stability.

Suggested Citation

  • Byrne, David & Kelly, Robert, 2019. "Monetary policy expectations and risk-taking among U.S. banks," Research Technical Papers 6/RT/19, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:6/rt/19
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Risk Taking; Bank Lending;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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