Does monetary policy influence banks’ risk weights under the internal ratings-based approach? |
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| Institution: | 1. Czech National Bank, Na Příkopě 28, 115 03, Prague 1, Czech Republic;2. Institute of Economic Studies, Charles University Prague, Opletalova 26, CZ-110 00, Prague, Czech Republic;1. Institute of World Economy, Shanghai Academy of Social Sciences, 200020, Shanghai, China;2. Department of Economics, University of Illinois at Urbana-Champaign, 61802, Champaign, USA;3. Institute of World Economy, Fudan University, 200433, Shanghai, China;4. Shanghai Institute of International Finance and Economics, 200433, Shanghai, China;1. Beijing Normal University, China;2. Shanghai Finance Institute, China;3. Institute of World Economy, Fudan University, China;4. Economic Development Research Center, Wuhan University, China;5. Institute of Finance and Economics, Shanghai University of Finance and Economics, China;1. Institute of Contemporary Socialism, Shandong University, Jinan, China;2. Emerging Economic Formats Research Institute of Shandong Management University, Jinan, China;3. Department of Economics, The Chinese University of Hong Kong, HKSAR, China;4. School of Economics, Nankai University, Tianjin, China;1. University of Pavia, Pavia, Italy;2. Asian Development Bank Institute, Tokyo, Japan |
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| Abstract: | This paper studies the extent to which monetary policy may affect banks’ perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we empirically analyze the effect of different monetary policy variables on banks’ risk weights for credit risk. We present robust evidence of a strong, statistically significant relationship between monetary policy easing and lower implicit risk weights of banks using the internal ratings-based approach. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. The presented findings have important implications for the prudential authority, which should be aware of the possible side effects of monetary policy on how banks measure risk. |
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| Keywords: | Banks Financial stability Internal ratings-based approach Monetary policy |
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