Re-exploring the nexus between monetary policy and banks' risk-taking |
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| Affiliation: | 1. Fluminense Federal University, Department of Economics and Central Bank of Brazil, Faculdade de Economia, Sala 434, Campus do Gragoatá, Bloco F, São Domingos, Niterói, RJ CEP: 24210-350, Brazil;2. Fluminense Federal University, Department of Economics, National Council for Scientific and Technological Development (CNPq), Faculdade de Economia, Sala 434, Campus do Gragoatá, Bloco F, São Domingos, Niterói, RJ CEP: 24210-350, Brazil;3. Central Bank of Brazil, Brazil;1. International University, Vietnam National University, Ho Chi Minh City, Vietnam;2. Glasgow School of Business & Society, Glasgow Caledonian University, UK;1. Fluminense Federal University, Department of Economics, National Council for Scientific and Technological Development (CNPq), Rua Tiradentes, 17, Ingá, Niterói, Rio de Janeiro, CEP: 24.210-510, Brazil;2. Fluminense Federal University, Department of Economics, Rua Tiradentes, 17, Ingá, Niterói, Rio de Janeiro, CEP: 24.210-510, Brazil;1. Department of Economics, University of Trier, Trier D-54286, Germany;2. Deutsche Bundesbank, Germany;1. Bank of Canada, Canada;2. Federal Reserve Bank of New York, United States;3. Nova School of Business and Economics, Portugal |
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| Abstract: | In this paper, we analyse the link between monetary policy and banks' risk-taking behaviour. Some theoretical and empirical studies show that monetary easing increases banks' appetite for risk related to asset valuation and the search for higher yield. However, the low interest rate environment that began in 2010 is casting doubt on these findings. Our study adds to analyses of the monetary risk-taking channel considering non-linearity, especially testing threshold effects in this channel. Using a dataset of US banks, we find that the impact of low interest rates on banks' risk behaviour depends on the previous monetary regime, that is on the deviation of monetary rates from the Taylor rule. We complement the literature on the Taylor rule and provide arguments that extend the use of the Taylor rule by Central Banks to financial stability purposes. |
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| Keywords: | Monetary policy Financial stability Bank risk-taking Non-dynamic panel threshold model E44 E58 G21 |
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