Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States

By Giovanni Dell'Ariccia, Luc Laeven, Gustavo Suarez

June 6, 2013

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Giovanni Dell'Ariccia, Luc Laeven, and Gustavo Suarez. Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States, (USA: International Monetary Fund, 2013) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.

Subject: Bank credit, Banking, Capital adequacy requirements, Financial institutions, Financial regulation and supervision, Loans, Market risk, Money, National accounts, Personal income

Keywords: Bank, Bank capital, Bank credit, Bank risk taking, Banks, Business loan, Capital adequacy requirements, Common stock, Global, Interest rates, Leverage, Loan maturity, Loans, Market risk, Monetary policy, Personal income, Risk, Risk rating, Target federal funds rate, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/143
Stock No:

WPIEA2013143
ISBN:

9781484381137
ISSN:

1018-5941

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