Monetary Policy, Leverage, and Bank Risk-Taking
We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.
|Date of creation:||01 Dec 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mitchell Berlin & Loretta J. Mester, 1997.
"Deposits and relationship lending,"
96-18, Federal Reserve Bank of Philadelphia.
- Mark T. Leary & Michael R. Roberts, 2005.
"Do Firms Rebalance Their Capital Structures?,"
Journal of Finance,
American Finance Association, vol. 60(6), pages 2575-2619, December.
- Michael R. Roberts & Mark T. Leary, 2004. "Do Firms Rebalance Their Capital Structures?," Econometric Society 2004 North American Summer Meetings 52, Econometric Society.
- Maddaloni, Angela & Peydró, José-Luis, 2010.
"Bank risk-taking, securitization, supervision and low interest rates: Evidence from the euro area and the U.S. lending standards,"
Working Paper Series
1248, European Central Bank.
- 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.
- repec:dgr:kubcen:201035s is not listed on IDEAS
- Douglas W. Diamond & Raghuram G. Rajan, 2009. "Illiquidity and Interest Rate Policy," NBER Working Papers 15197, National Bureau of Economic Research, Inc.
- Gabriella Chiesa, .
"Incentive-based Lending Capacity, Competition and Regulation in Banking,"
92, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Chiesa, Gabriella, 2001. "Incentive-Based Lending Capacity, Competition and Regulation in Banking," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 28-53, January.
- repec:dgr:kubcen:200931s is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:10/276. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.