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The Fed Put and Bank Risk-Taking: Evidence from the Loan Book

Author

Listed:
  • Xudong An
  • Jan Harren
  • Saket Hegde
  • Mete Kilic
  • Rodney Ramcharan

Abstract

This paper shows that monetary policy changes the risk composition of bank lending by altering the perceived tail risk of bank equity: when FOMC announcements compress the likelihood of costly low-equity states, banks originate riskier commercial and industrial loans. We measure bank-specific tail-risk shocks using equity put option returns and link them to originations in supervisory loan data. The shift toward riskier lending emerges after announcements and extends to lending within existing bank-borrower relationships. Stress-test capital and banks' own reports tying lending standards to risk tolerance corroborate the mechanism. Short-term compensation, earnings pressure, and competition amplify this risk-taking channel.

Suggested Citation

  • Xudong An & Jan Harren & Saket Hegde & Mete Kilic & Rodney Ramcharan, 2026. "The Fed Put and Bank Risk-Taking: Evidence from the Loan Book," CESifo Working Paper Series 12980, CESifo.
    • Handle: RePEc:ces:ceswps:_12980
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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