Monetary Policy, Bank Leverage, and Financial Stability
AbstractThis paper develops a model to assess how monetary policy rates affect bank risk-taking. In the model, a reduction in the risk-free rate increases lending profitability by reducing funding costs and increasing the surplus the monopolistic bank extracts from borrowers. Under limited liability, this increased profitability affects only upside returns, inducing the bank to take excessive leverage and hence risk. Excessive risk-taking increases as the interest rate decreases. At a broader level, the model illustrates how a benign macroeconomic environment can lead to excessive risk-taking, and thus it highlights a role for macroprudential regulation.
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 International Monetary Fund in its series IMF Working Papers with number 11/244.
Date of creation: 01 Oct 2011
Date of revision:
Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-28 (All new papers)
- NEP-BAN-2011-11-28 (Banking)
- NEP-CBA-2011-11-28 (Central Banking)
- NEP-MAC-2011-11-28 (Macroeconomics)
- NEP-MON-2011-11-28 (Monetary Economics)
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.:
- Olivier Jeanne & Anton Korinek, 2010.
"Managing Credit Booms and Busts: A Pigouvian Taxation Approach,"
Working Paper Series
WP10-12, Peterson Institute for International Economics.
- Jeanne, Olivier & Korinek, Anton, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," CEPR Discussion Papers 8015, C.E.P.R. Discussion Papers.
- Jeanne, O. & Korinek, A., 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," Discussion Paper 2010-108S, Tilburg University, Center for Economic Research.
- Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377, National Bureau of Economic Research, Inc.
- Jiménez, Gabriel & Ongena, Steven & Peydró-Alcalde, José Luis & Saurina, Jesús, 2007.
"Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk?,"
CEPR Discussion Papers
6514, C.E.P.R. Discussion Papers.
- 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 2007-75, Tilburg University, Center for Economic Research.
- DellAriccia, Giovanni & Laeven, Luc & Marquez, Robert, 2011.
"Monetary Policy, Leverage, and Bank Risk-taking,"
CEPR Discussion Papers
8199, C.E.P.R. Discussion Papers.
- Enrique Mendoza & Javier Bianchi, 2010.
"Overborrowing, financial crises and ‘macro-prudential’ taxes,"
Federal Reserve Bank of San Francisco, issue Oct.
- Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
- Javier Bianchi, 2010. "Credit Externalities: Macroeconomic Effects and Policy Implications," American Economic Review, American Economic Association, vol. 100(2), pages 398-402, May.
- 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.
- Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
- Fabian Valencia, 2008. "Banks' Precautionary Capital and Credit Crunches," IMF Working Papers 08/248, International Monetary Fund.
- Angela Maddalonia & Jose-Luis Peydro, 2013.
"Monetary Policy, macroprudential Policy, and Banking Stability: Evidence from the Euro Area,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 9(1), pages 121-169, March.
- Maddaloni, Angela & Peydró, José-Luis, 2013. "Monetary policy, macroprudential policy and banking stability: evidence from the euro area," Working Paper Series 1560, European Central Bank.
- 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.
- 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.
- Agur, Itai & Demertzis, Maria, 2012. "Excessive bank risk taking and monetary policy," Working Paper Series 1457, European Central Bank.
- Itai Agur & Maria Demertzis, 2011.
""Leaning Against the Wind" and the Timing of Monetary Pollicy,"
DNB Working Papers
303, Netherlands Central Bank, Research Department.
- Agur, Itai & Demertzis, Maria, 2013. "“Leaning against the wind” and the timing of monetary policy," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 179-194.
- Itai Agur & Maria Demertzis, 2013. ""Leaning Against the Wind" and the Timing of Monetary Policy," IMF Working Papers 13/86, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).
If references are entirely missing, you can add them using this form.