Unveiling the effects of monetary surprises: Risk-taking and credit supply of U.S. banks

We provide new evidence on how unexpected shifts in monetary policy — monetary surprises — influence U.S. banks' risk-taking behavior and credit supply. Unlike prior studies focusing on interest rate changes per se, we highlight that it is the deviation from expected policy paths that crucially drives banking behavior. Using a novel high-frequency measure of monetary surprise and a dynamic panel of 259 U.S. banks (2001–2018), we find that dovish surprises (lower-than-expected interest rates) foster bank soundness by reducing risk, while hawkish surprises increase banks’ risk-taking and dampen credit growth, especially household lending. Economically, monetary surprises affect banks through both profitability channels and balance sheet effects: unanticipated monetary tightening reduces capitalization and amplifies incentives to take risk. Our findings suggest that monetary policy surprises — even under regimes of high central bank transparency — remain potent drivers of bank behavior and financial stability risks. This work extends the monetary risk-taking literature by showing that not only the level of interest rates but the unexpectedness of monetary actions crucially affects banks, thereby advocating for closer integration of monetary and prudential policies.