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The Most Expected Things Often Come as a Surprise: Analysis of the Impact of Monetary Surprises on the Bank's Risk and Activity

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  • Melchisedek Joslem Ngambou Djatche

    (Université Côte d'Azur
    GREDEG CNRS)

Abstract

In this paper, we analyse the link between monetary surprises and banks' activity and risk-taking. Some theoretical and empirical studies show that monetary easing increases banks' appetite for risk, affect credit allocation and bank's profitability. Our study adds to analyses of the monetary risk-taking channel considering monetary surprise, i.e. the impact of unexpected changes in monetary policy on bank's risk and activity. Using a dataset of US banks, we find that negative monetary surprises (higher increase or lower decrease of interest rates than expected) lead banks to take more risk, to grant more corporate loans than consumption loans, and to be more profitable. We complement the literature on the risk-taking channel and provide arguments that Central Banks can manage financial stability.

Suggested Citation

  • Melchisedek Joslem Ngambou Djatche, 2021. "The Most Expected Things Often Come as a Surprise: Analysis of the Impact of Monetary Surprises on the Bank's Risk and Activity," GREDEG Working Papers 2021-45, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2021-45
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    Keywords

    monetary surprise; financial stability; bank risk-taking; VAR model; dynamic panel regression;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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