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What Do Data Say About Monetary Policy, Bank Liquidity and Bank Risk Taking?

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  • Marcella Lucchetta

Abstract

This paper tests empirically the linkage between banks' investment and interbank lending decisions in response to interest rate changes. We draw conclusions for the monetary policy, which uses the interest rate as its main tool. Across European countries we find that the risk‐free (i.e. monetary policy) interest rate negatively affects the liquidity retained by banks and the decision of a bank to be a lender in the interbank market. Instead, the interbank interest rate has a positive impact on these decisions. We also find that banks who lend show less risk‐taking behaviour and tend to be smaller than those who are borrowers. Most importantly, the risk‐free interest rate is positively correlated with loans investment and bank risk‐taking behaviour.

Suggested Citation

  • Marcella Lucchetta, 2007. "What Do Data Say About Monetary Policy, Bank Liquidity and Bank Risk Taking?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 36(2), pages 189-203, July.
    • Handle: RePEc:bla:ecnote:v:36:y:2007:i:2:p:189-203
    DOI: 10.1111/j.1468-0300.2007.00180.x
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    References listed on IDEAS

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