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Does a Low Interest Rate Environment Affect Risk Taking in Austria?

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Abstract

It has recently been argued that a prolonged period of low interest rates under benign economic conditions tends to produce excessive risk taking in financial markets. The mechanism by which monetary policy affects investors’ risk positions has been called the “risk-taking channel” of monetary policy. We discuss this channel and compare it with the more traditional broad credit channel. Furthermore, we provide new evidence on the existence of this channel, using Austrian firm and bank data taken from the OeNB’s credit register. In particular, we show that the expected default rates within Austrian banks’ business-loan portfolios increased during the period of low refinancing rates from 2003 to 2005. This result is new and important in at least two respects: first, we construct a measure of Austrian banks’ portfolio risk on the basis of a matched lender and borrower dataset. Second, we specifically identify the effect of a monetary policy regime which is characterized by interest rates that are held at a low level for too long, as opposed to the more traditional effect of monetary policy “shocks,” usually identified through quarter-on-quarter changes in short-term interest rates.

Suggested Citation

  • Paul Gaggl & Maria Teresa Valderrama, 2010. "Does a Low Interest Rate Environment Affect Risk Taking in Austria?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 32-48.
  • Handle: RePEc:onb:oenbmp:y:2010:i:4:b:2
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    File URL: https://www.oenb.at/dam/jcr:02946738-4187-4178-a41a-474a72947f50/mop_2010_q4_analyses02_tcm16-221655.pdf
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    1. Giovanni Dell'Ariccia, 2010. "Monetary Policy and Bank Risk-Taking," IMF Staff Position Notes 2010/09, International Monetary Fund.
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    Cited by:

    1. Gabriel Jiménez & Steven Ongena & José‐Luis Peydró & Jesús Saurina, 2014. "Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?," Econometrica, Econometric Society, vol. 82(2), pages 463-505, March.
    2. Steven Ongena & Günseli Tümer–Alkan & Natalja von Westernhagen, 2018. "Do Exposures to Sagging Real Estate, Subprime, or Conduits Abroad Lead to Contraction and Flight to Quality in Bank Lending at Home?," Review of Finance, European Finance Association, vol. 22(4), pages 1335-1373.
    3. Yiping Huang & Xiang Li & Chu Wang, 2019. "What Does Peer-To-Peer Lending Evidence Say about the Risk-Taking Channel of Monetary Policy?," CESifo Working Paper Series 7792, CESifo.
    4. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2014. "Does Monetary Policy Affect Bank Risk?," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 95-136, March.
    5. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2017. "“In the Short Run Blasé, In the Long Run Risqué”," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 18(3), pages 181-226, August.
    6. Mite Miteski & Ana Mitreska & Mihajlo Vaskov, 2019. "The risk-taking channel of monetary policy in Macedonia: evidence from credit registry data," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Are post-crisis statistical initiatives completed?, volume 49, Bank for International Settlements.
    7. Dang, Van Dan & Dang, Van Cuong, 2020. "The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime," Research in International Business and Finance, Elsevier, vol. 54(C).
    8. 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.
    9. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "An analysis of involuntary excess reserves, monetary policy and risk-taking behaviour of Chinese Banks," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 63-72.
    10. 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.
    11. Brana, Sophie & Campmas, Alexandra & Lapteacru, Ion, 2019. "(Un)Conventional monetary policy and bank risk-taking: A nonlinear relationship," Economic Modelling, Elsevier, vol. 81(C), pages 576-593.
    12. Mite Miteski & Ana Mitreska & Mihajlo Vaskov, 2018. "The Risk-Taking Channel of Monetary Policy in Macedonia: Evidence from Credit Registry Data," Working Papers 2018-07, National Bank of the Republic of North Macedonia.

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    More about this item

    Keywords

    monetary policy; bank behavior; risk taking;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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