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Bank Risk-Taking and Impaired Monetary Policy Transmission

Author

Listed:
  • Philipp J. Koenig

    (Deutsche Bundesbank)

  • Eva Schliephake

    (Lisbon School of Business and Economics)

Abstract

How does risk-taking affect the transmission of interest rate changes into loan issuance? We study this question in a banking model with agency frictions. The risk-free rate affects bank lending via a portfolio adjustment and a loan risk channel. The former implies that the bank issues more loans when the risk-free rate falls. The latter implies that the bank may issue fewer loans because lower risk-free rates lead to higher risk-taking. Thus, the loan risk channel can counteract the portfolio adjustment channel. There exists a reversal rate, so that loan supply even contracts due to higher risk-taking. The model’s implications square with recent evidence on monetary transmission.

Suggested Citation

  • Philipp J. Koenig & Eva Schliephake, 2024. "Bank Risk-Taking and Impaired Monetary Policy Transmission," International Journal of Central Banking, International Journal of Central Banking, vol. 20(3), pages 257-371, July.
    • Handle: RePEc:ijc:ijcjou:y:2024:q:3:a:6
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    References listed on IDEAS

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    Cited by:

    1. Mariana, Christy Dwita & Raz, Arisyi F., 2025. "Central banks’ financial stability orientation and bank risk-taking," Journal of Financial Stability, Elsevier, vol. 78(C).

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