Monetary Policy and Excessive Bank Risk Taking
AbstractThis paper shows that a rate hike has countervailing effects on banks' risk appetite. It reduces risk when the debt burden of the banking sector is modest. We model a regulator whose trade-off between bank risk and credit supply is derived from a welfare function. We show that the regulator cannot optimally neutralize the welfare effects that the interest rate has through bank incentives. The larger the correlation between banks' projects, the more important the role for monetary policy. In a dynamic setting, not internalizing bank risk leads a monetary authority to keep rates low for too long after a negative shock.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 271.
Date of creation: Dec 2010
Date of revision:
Monetary policy; Financial stability; Maturity mismatch; Leverage; Regulation;
Other versions of this item:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-BAN-2011-01-03 (Banking)
- NEP-CBA-2011-01-03 (Central Banking)
- NEP-MAC-2011-01-03 (Macroeconomics)
- NEP-MON-2011-01-03 (Monetary Economics)
- NEP-REG-2011-01-03 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Douglas W. Diamond & Raghuram G. Rajan, 2009.
"The Credit Crisis: Conjectures about Causes and Remedies,"
American Economic Review,
American Economic Association, vol. 99(2), pages 606-10, May.
- Douglas W. Diamond & Raghuram Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," NBER Working Papers 14739, National Bureau of Economic Research, Inc.
- Tobias Adrian & Hyun Song Shin, 2009.
"Money, liquidity, and monetary policy,"
360, Federal Reserve Bank of New York.
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
NBER Working Papers
6455, National Bureau of Economic Research, Inc.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Farhi, Emmanuel & Tirole, Jean, 2009.
"Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts,"
IDEI Working Papers
571, Institut d'Économie Industrielle (IDEI), Toulouse, revised Oct 2010.
- Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
- Emmanuel Farhi & Jean Tirole, 2009. "Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts," NBER Working Papers 15138, National Bureau of Economic Research, Inc.
- Jean Tirole & Emmanuel Farhi, 2009. "Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts," Working Papers 2009.57, Fondazione Eni Enrico Mattei.
- Jean Tirole & Emmanuel Farhi, 2010. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," 2010 Meeting Papers 822, Society for Economic Dynamics.
- Farhi, Emmanuel & Tirole, Jean, 2009. "Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts," TSE Working Papers 09-052, Toulouse School of Economics (TSE), revised Oct 2010.
- Giovanni Dell'Ariccia & Robert Marquez & Luc Laeven, 2010.
"Monetary Policy, Leverage, and Bank Risk-Taking,"
IMF Working Papers
10/276, International Monetary Fund.
- Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.
- Acharya, Viral V & Mehran, Hamid & Thakor, Anjan, 2012.
"Caught between Scylla and Charybdis? Regulating bank leverage when there is rent-seeking and risk-shifting,"
CEPR Discussion Papers
8822, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Hamid Mehran & Anjan Thakor, 2010. "Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting," Staff Reports 469, Federal Reserve Bank of New York.
- Viral V. Acharya & Hamid Mehran & Anjan V. Thakor, 2010. "Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting," Working Paper 1024, Federal Reserve Bank of Cleveland.
- Thakor, Anjan & Mehran, Hamid & Acharya, Viral V., 2010. "Caught Between Scylla and Charybdis? Regulating Bank Leverage When There is Rent Seeking and Risk Shifting," Working paper 643, Regulation2point0.
- Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999.
"Is Bank Supervision Central To Central Banking?,"
The Quarterly Journal of Economics,
MIT Press, vol. 114(2), pages 629-653, May.
- John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
- Brissimis, Sophocles N. & Delis, Manthos D., 2010.
"Bank heterogeneity and monetary policy transmission,"
Working Paper Series
1233, European Central Bank.
- Sophocles N. Brissimis & Manthos D. Delis, 2009. "Bank Heterogeneity and Monetary Policy Transmission," Working Papers 101, Bank of Greece.
- Tobias Adrian & Hyun Song Shin, 2009.
"Financial intermediaries and monetary economics,"
398, Federal Reserve Bank of New York.
- Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009.
"Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market,"
2009-46 S, Tilburg University, Center for Economic Research.
- Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, 03.
- Dell''Ariccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers.
- Yener Altunbas & Leonardo Gambacorta & David MarquÃ©s-IbÃ¡Ã±ez, 2009.
"Bank risk and monetary policy,"
Temi di discussione (Economic working papers)
712, Bank of Italy, Economic Research and International Relations Area.
- Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
- Ioannidou, V. & Ongena, S. & Peydro, J.L., 2009. "Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment," Discussion Paper 2009-31 S, Tilburg University, Center for Economic Research.
- Ioannidou, Vasso P., 2005.
"Does monetary policy affect the central bank's role in bank supervision?,"
Journal of Financial Intermediation,
Elsevier, vol. 14(1), pages 58-85, January.
- Ioannidou, V., 2002. "Does Monetary Policy Affect the Central Bank's Role in Bank Supervision?," Discussion Paper 2002-54, Tilburg University, Center for Economic Research.
- Tobias Adrian & Hyun Song Shin, 2008.
"Financial intermediaries, financial stability, and monetary policy,"
346, Federal Reserve Bank of New York.
- Shin, Hyun Song & Adrian, Tobias, 2008. "Financial intermediaries, financial stability and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 287-334.
- Franck Portier & Aude Pommeret & Olivier Loisel, 2008. "Monetary policy and herd behavior in new-tech investment," 2008 Meeting Papers 444, Society for Economic Dynamics.
- Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Macroeconomic Patterns and Monetary Policy in the Run-Up to Asset Price Busts," IMF Working Papers 09/252, International Monetary Fund.
- Piti Disyatat, 2005.
"Inflation Targeting, Asset Prices, and Financial Imbalances: Conceptualizing the Debate,"
2005-09, Economic Research Department, Bank of Thailand.
- Disyatat, Piti, 2010. "Inflation targeting, asset prices, and financial imbalances: Contextualizing the debate," Journal of Financial Stability, Elsevier, vol. 6(3), pages 145-155, September.
- Piti Disyatat, 2005. "Inflation targeting, asset prices and financial imbalances: conceptualizing the debate," BIS Working Papers 168, Bank for International Settlements.
- Buch, Claudia M. & Eickmeier, Sandra & Prieto, Esteban, 2010.
"Macroeconomic factors and micro-level bank risk,"
Discussion Paper Series 1: Economic Studies
2010,20, Deutsche Bundesbank, Research Centre.
- Franklin Allen & Ana Babus & Elena Carletti, 2009. "Financial Crises: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 97-116, November.
- Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
- Ramayandi, Arief & Rawat, Umang & Tang, Hsiao Chink, 2014. "Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia," Working Papers on Regional Economic Integration 123, Asian Development Bank.
- Jokivuolle, Esa & Kiema, Ilkka & Vesala, Timo, 2010. "Credit allocation, capital requirements and output," Research Discussion Papers 17/2010, Bank of Finland.
- Landais, Bernard, 2011.
"Conduite et efficacité de la politique économique : les leçons de la crise
[Management and Efficiency of the Economic Policies : The Crisis' Lessons"]," MPRA Paper 31223, University Library of Munich, Germany.
- 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.
- Simona E. Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2011. "Do Low Interest Rates Sow the Seeds of Financial Crises?," Working Papers 11-31, Bank of Canada.
- Delis, Manthos D. & Kouretas, Georgios P., 2011.
"Interest rates and bank risk-taking,"
Journal of Banking & Finance,
Elsevier, vol. 35(4), pages 840-855, April.
- Wanvimol Sawangngoenyuang & Sukrita Sa-nguanpan & Worawut Sabborriboon, 2012. "Financial Systemic Stability: Challenging Aspects of Central Banks," Working Papers 2012-06, Economic Research Department, Bank of Thailand.
- Simona E. Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2012. "Collateralized Borrowing and Risk Taking at Low Interest Rates?," University of Western Ontario, Economic Policy Research Institute Working Papers 20121, University of Western Ontario, Economic Policy Research Institute.
- DellʼAriccia, Giovanni & Laeven, Luc & Marquez, Robert, 2014. "Real interest rates, leverage, and bank risk-taking," Journal of Economic Theory, Elsevier, vol. 149(C), pages 65-99.
- Ekin Ayse Ozsuca & Elif Akbostanci, 2012. "An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey," ERC Working Papers 1208, ERC - Economic Research Center, Middle East Technical University, revised Dec 2012.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.