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The trade-off between monetary policy and bank stability

Author

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  • Martien Lamers

    (University of Groningen, Netherlands)

  • Frederik Mergaerts

    (Ghent University, Belgium)

  • Elien Meuleman

    (Ghent University, Belgium)

  • Rudi Vander Vennet

    (Ghent University, Belgium)

Abstract

This paper investigates how monetary policy interventions by the European Central Bank and the Federal Reserve affect the stock market perception of bank systemic risk. In a first step, we identify monetary policy shocks using a structural VAR approach by exploiting the changes of the volatility of these shocks on days on which there are monetary policy announcements. The second step consists of a panel regression analysis, in which we relate monetary policy shocks to market-based measures of bank systemic risk. Our sample includes information on both Euro Area and U.S. listed banks, covering a sample period from October 2008 to December 2015. We condition the impact of the monetary policy shocks on a set of bank-specific variables, thereby allowing for a heterogeneous transmission of monetary policy. We furthermore use the differences between Euro Area core and periphery countries and the additional granularity of U.S. accounting data to assess which channels determine the transmission of monetary policy. Our results indicate that by supporting weaker banks and allowing banks to delay recognizing bad loans, accommodative monetary policy may contribute to the buildup of vulnerabilities in the banking sector and may make an eventual policy tightening more difficult. On the other hand, a continuation of expansionary monetary policy may increase risk-taking incentives by further compressing banks’ net interest margins.

Suggested Citation

  • Martien Lamers & Frederik Mergaerts & Elien Meuleman & Rudi Vander Vennet, 2016. "The trade-off between monetary policy and bank stability," Working Paper Research 308, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201610-308
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    3. Melchisedek Joslem Ngambou Djatche, 2020. "Monetary Policy, Prudential Policy, and Bank's Risk-Taking: A Literature Review," GREDEG Working Papers 2020-40, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    4. Ambler, Steve & Rumler, Fabio, 2019. "The effectiveness of unconventional monetary policy announcements in the euro area: An event and econometric study," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 48-61.
    5. Buchholz, Manuel & Schmidt, Kirsten & Tonzer, Lena, 2020. "Do conventional monetary policy instruments matter in unconventional times?," Journal of Banking & Finance, Elsevier, vol. 118(C).
    6. Elien Meuleman & Rudi Vander Vennet, 2020. "Macroprudential policy, monetary policy and Eurozone bank risk," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 20/1004, Ghent University, Faculty of Economics and Business Administration.
    7. Darracq Pariès, Matthieu & Körner, Jenny & Papadopoulou, Niki, 2019. "Empowering central bank asset purchases: The role of financial policies," Working Paper Series 2237, European Central Bank.
    8. Matthys, Thomas & Meuleman, Elien & Vander Vennet, Rudi, 2020. "Unconventional monetary policy and bank risk taking," Journal of International Money and Finance, Elsevier, vol. 109(C).
    9. Viacheslav M. Shavshukov & Natalia A. Zhuravleva, 2020. "Global Economy: New Risks and Leadership Problems," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 8(1), pages 1-17, February.
    10. Ngambou Djatche, Melchisédek Joslem, 2019. "Re-exploring the nexus between monetary policy and banks' risk-taking," Economic Modelling, Elsevier, vol. 82(C), pages 294-307.
    11. Nicolas Soenen & Rudi Vander Vennet, 2020. "Drivers of Bank Default Risk: Bank Business Models, the Sovereign and Monetary Policy," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 20/997, Ghent University, Faculty of Economics and Business Administration.
    12. R. Wouters, 2016. "The transmission mechanism of new and traditional instruments of monetary and macroprudential policy," Economic Review, National Bank of Belgium, issue iii, pages 105-117, December.
    13. Bak Barnaba Chol & Elizabeth Kalunda Nthambi & Joseph N. Kamau, 2019. "Influence of bank stability on the financial performance of commercial banks in South Sudan," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 8(5), pages 251-257, September.
    14. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    banking; monetary policy; systemic risk; identification-through-heteroskedasticity;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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