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When Is It Less Costly for Risky Firms to Borrow? Evidence from the Bank Risk-Taking Channel of Monetary Policy

  • Teodora Paligorova
  • João A. C. Santos

In an investigation of banks’ loan pricing policies in the United States over the past two decades, this study finds supporting evidence for the bank risk-taking channel of monetary policy. We show that banks charge lower spreads when they lend to riskier borrowers relative to the spreads they charge on loans to safer borrowers in periods of low short-term rates compared to periods of high short-term rates. The interest discount that banks offer riskier borrowers when short-term rates are low is robust to borrower-, loan-, and bank-specific factors as well as to macroeconomic factors known to affect loan rates. The discount is also robust to bank-firm fixed effects. Finally, our tests that build on the micro information banks provide on their lending standards in the Senior Loan Officers Opinion Survey suggest the interest rate discount that riskier borrowers receive when short-term rates are low is bank driven.

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Paper provided by Bank of Canada in its series Working Papers with number 12-10.

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Length: 54 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bca:bocawp:12-10
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  1. Hale, Galina & Santos, João A.C., 2009. "Do banks price their informational monopoly?," Journal of Financial Economics, Elsevier, vol. 93(2), pages 185-206, August.
  2. Angela Maddaloni & Jose-Luis Peydro, 2011. "Bank Risk-taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro-area and the U.S. Lending Standards," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2121-2165.
  3. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2010. "Bank risk and monetary policy," Journal of Financial Stability, Elsevier, vol. 6(3), pages 121-129, September.
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  7. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
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  10. Gabriel Jiménez & Steven Ongena & José Luis Peydró & Jesús Saurina, 2009. "Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking?," Banco de Espa�a Working Papers 0833, Banco de Espa�a.
  11. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
  12. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
  13. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Stacey L. Schreft & Raymond E. Owens, 1991. "Survey evidence of tighter credit conditions: what does it mean?," Working Paper 91-05, Federal Reserve Bank of Richmond.
  15. Bassett, William F. & Chosak, Mary Beth & Driscoll, John C. & Zakrajšek, Egon, 2014. "Changes in bank lending standards and the macroeconomy," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 23-40.
  16. repec:dgr:kubcen:200931s is not listed on IDEAS
  17. Gourieroux, Christian & Monfort, Alain & Renault, Eric & Trognon, Alain, 1987. "Generalised residuals," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 5-32.
  18. Jo�O A. C. Santos & Andrew Winton, 2008. "Bank Loans, Bonds, and Information Monopolies across the Business Cycle," Journal of Finance, American Finance Association, vol. 63(3), pages 1315-1359, 06.
  19. Jiminez, G. & Ongena, S. & Saurina, J., 2007. "Hazardous Times for Monetary Policy : What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?," Discussion Paper 2007-75, Tilburg University, Center for Economic Research.
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