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In Search for Yield? New Survey-Based Evidence on Bank Risk Taking

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  • Claudia M. Buch
  • Sandra Eickmeier
  • Esteban Prieto

Abstract

There is growing consensus that the conduct of monetary policy can have an impact on financial and economic stability through the risk-taking incentives of banks. Falling interest rates might induce a “search for yield” and generate incentives to invest into risky activities. This paper provides evidence on the link between monetary policy and commercial property prices and the risk-taking incentives of banks. We use a factor-augmented vector autoregressive model (FAVAR) for the U.S. for the years 1997-2008. We include standard macroeconomic indicators and factors summarizing information provided in the Federal Reserve’s Survey of Terms of Business Lending. These data allow modeling the reactions of banks’ new lending volumes and the riskiness of new loans. We do not find evidence for a risk-taking channel for the entire banking system after a monetary policy loosening or an unexpected increase in property prices. This masks, however, important differences across banking groups. Small domestic banks increase their exposure to risk, foreign banks lower risk, and large domestic banks do not change their risk exposure.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3375.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3375

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Keywords: FAVAR; bank risk taking; macro-finance linkages; monetary policy; commercial property prices;

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References

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  1. Jiminez, G. & Ongena, S. & Saurina, J., 2007. "Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?," Discussion Paper, Tilburg University, Center for Economic Research 2007-75, Tilburg University, Center for Economic Research.
  2. DellAriccia, Giovanni & Laeven, Luc & Marquez, Robert, 2011. "Monetary Policy, Leverage, and Bank Risk-taking," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8199, C.E.P.R. Discussion Papers.
  3. Giovanni Dell'Ariccia, 2010. "Monetary Policy and Bank Risk-Taking," IMF Staff Position Notes 2010/09, International Monetary Fund.
  4. Bester,Helmut Hellwig,Martin, 1987. "Moral hazard and equilibrium credit rationing: An overview of the issues," Discussion Paper Serie A 125, University of Bonn, Germany.
  5. De Graeve, F. & Kick, T. & Koetter, M., 2008. "Monetary policy and financial (in)stability: An integrated micro-macro approach," Journal of Financial Stability, Elsevier, Elsevier, vol. 4(3), pages 205-231, September.
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Cited by:
  1. Delis, Manthos D & Hasan, Iftekhar & Mylonidis, Nikolaos, 2011. "The risk-taking channel of monetary policy in the USA: Evidence from micro-level data," MPRA Paper 34084, University Library of Munich, Germany.
  2. Claudia M. Buch & Linda S. Goldberg, 2014. "International Banking and Liquidity Risk Transmission: Lessons from Across Countries," NBER Working Papers 20286, National Bureau of Economic Research, Inc.
  3. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2014. "Does Monetary Policy Affect Bank Risk?," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 95-136, March.
  4. Pagliacci, Carolina, 2014. "Latin American Performance to External Shocks: What Has Really Been Sweat?," MPRA Paper 57816, University Library of Munich, Germany.
  5. Giovanni Dell'Ariccia & Luc Laeven & Gustavo Suarez, 2013. "Bank Leverage and Monetary Policy's Risk-Taking Channel," IMF Working Papers 13/143, International Monetary Fund.
  6. Ekin Ayse Ozsuca & Elif Akbostanci, 2012. "An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey," ERC Working Papers, ERC - Economic Research Center, Middle East Technical University 1208, ERC - Economic Research Center, Middle East Technical University, revised Dec 2012.
  7. 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, Banco de Portugal, Economics and Research Department.

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