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Monetary policy, funding cost and banks’ risk-taking: evidence from the USA

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  • Constantin Bürgi

    (University College Dublin)

  • Bo Jiang

    (Xi’an Jiaotong-Liverpool University)

Abstract

How much deposits and equity a bank has influences how a banks’ lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We show in a value-at-risk RTC model that the lending for banks with relatively more equity and non-interest-bearing deposits should respond less to monetary policy tightening. This suggests that non-interest-bearing deposits act as “pseudo capital.” In a panel of US banks, we find strong evidence in support of our model for various risk measures.

Suggested Citation

  • Constantin Bürgi & Bo Jiang, 2023. "Monetary policy, funding cost and banks’ risk-taking: evidence from the USA," Empirical Economics, Springer, vol. 65(3), pages 1129-1148, September.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:3:d:10.1007_s00181-023-02384-z
    DOI: 10.1007/s00181-023-02384-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank lending; Deposits; Value-at-risk; Pseudo capital;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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