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Risk Taking Channel of Monetary Policy: A Review of the Evidence and Some Preliminary Results for India

Author

Listed:
  • Sarkar Sanjukta

    () (Indian Institute of Management Kozhikode)

  • Sensarma Rudra

    () (Indian Institute of Management Kozhikode)

Abstract

Some recent papers have studied the link between the stance of monetary policy and the risktaking behavior of banks. Loose monetary policy can encourage banks to reach for yield, which will increase their share of risky assets and also induces banks to take more risks on account of a rise in asset values. On the funding side, loose monetary policy increases incentives to use more short term funding. This paper provides a comprehensive review of the evidence on the risk taking channel of monetary transmission and empirically examines the existence of the risk taking channel in Indian banking. The paper’s novelty also lies in the fact that it incorporates the role of ownership and empirically tests the response of banks in terms of a wide array of risks,i.e., asset, default and market risks in the face of easy and tight monetary stances adopted by the central bank.

Suggested Citation

  • Sarkar Sanjukta & Sensarma Rudra, 2017. "Risk Taking Channel of Monetary Policy: A Review of the Evidence and Some Preliminary Results for India," Working papers 250, Indian Institute of Management Kozhikode.
  • Handle: RePEc:iik:wpaper:250
    as

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    References listed on IDEAS

    as
    1. Giovanni Dell'Ariccia & Robert Marquez & Luc Laeven, 2010. "Monetary Policy, Leverage, and Bank Risk Taking," IMF Working Papers 10/276, International Monetary Fund.
    2. repec:hal:journl:hal-00785225 is not listed on IDEAS
    3. Delis, Manthos D & Hasan, Iftekhar & Mylonidis, Nikolaos, 2011. "The risk-taking channel of monetary policy in the USA: Evidence from micro-level data," MPRA Paper 34084, University Library of Munich, Germany.
    4. Adrian, Tobias & Song Shin, Hyun, 2010. "Financial Intermediaries and Monetary Economics," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 12, pages 601-650 Elsevier.
    5. Saumitra N. Bhaduri & Toto Goyal, 2015. "The bank lending channel of monetary policy transmission: evidence from an emerging market, India," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 6(1), pages 1-20.
    6. Khundrakpam, Jeevan Kumar, 2011. "Credit Channel of Monetary Transmission in India - How Effective and Long is the Lag?," MPRA Paper 50899, University Library of Munich, Germany.
    7. Angeloni, Ignazio & Faia, Ester & Lo Duca, Marco, 2015. "Monetary policy and risk taking," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 285-307.
    8. Marcella Lucchetta, 2007. "What Do Data Say About Monetary Policy, Bank Liquidity and Bank Risk Taking?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 36(2), pages 189-203, July.
    9. Barry, Thierno Amadou & Lepetit, Laetitia & Tarazi, Amine, 2011. "Ownership structure and risk in publicly held and privately owned banks," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1327-1340, May.
    10. Giovanni Dell'Ariccia, 2010. "Monetary Policy and Bank Risk-Taking," IMF Staff Position Notes 2010/09, International Monetary Fund.
    11. Raghuram G. Rajan, 2005. "Has financial development made the world riskier?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 313-369.
    12. G.J. De Bondt, 1999. "Credit channels in Europe: a cross-country investigation," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 52(210), pages 295-326.
    13. Prachi Mishra & Peter J Montiel & Rajeswari Sengupta, 2016. "Monetary Transmission in Developing Countries; Evidence from India," IMF Working Papers 16/167, International Monetary Fund.
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    Keywords

    Banks; Risk; Monetary Policy;

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