Are central banks to blame? Monetary policy and bank lending behavior

Abstract

This paper tests the conjecture that easy money policies of central banks, that is setting low rates for long, are responsible for the excess risk-taking behavior that led to the global financial crisis. If the conjecture holds then policy rate shocks should have persistent effects on bank behavior either through the bank lending or the risk-taking channel. Using data for the period prior to the global financial crisis, and a shock persistence methodology, we find that the policy rate has only limited idiosyncratic effects on bank lending growth and no effect on credit risk.

Bank Lending Rates and the Remuneration for Risk: Evidence from Portfolio and Loan Level Data

“…With regards to the banking sector, the literature has focused mostly on either assessing the risk and return relationship via stock market returns (Elyasiani and Mansur, 2003;Neuberger, 1991), or on how monetary policy, via the risk-taking channel, can potentially affect bank lending policies. This realm has gathered much popularity in recent years (see, among others, Ghysels et al, 2016;Delis et al, 2017;Dell'Ariccia et al, 2017;Bonfim and Soares, 2018;Morais et al, 2019;Afanasyeva and Güntner, 2020;Michail et al, 2021). As the literature suggests, ex ante riskier borrowers receive more funding when interest rates are lower.…”

“…Furthermore, there has been no study, to the best to our knowledge, which directly employs a direct credit risk metric. Usual proxies include capital to assets ratios, loans to assets ratios, and NPL ratios, all of which are influenced by many exogenous factors, including the banks' risk appetite in the past, current macroeconomic conditions, and interest rate changes (see Michail et al, (2021) for more details).…”

Historical Islamic Fiscal Solutions in Times of Crises and Its Contemporary Equivalences

“…Since the great financial crisis (GFC), banks have been labelled as "Too Big to Fall", and while banks do play an important role in an economy as they offer a way to channel capital from those who have it to those who need it, different papers covering the GFC shows that banks are an inefficient tool in redistributing wealth. Michail et al (2021) show that a lower policy rate does not always alter the lending behavior of commercial banks in the long term, as deposit levels and credit risks take priority (Michail et al, 2021). Other papers focus on the relationship between ownership of the banks and lending behavior in emerging markets during crises, government-owned banks increase their lending and risk-taking behavior in crises times in order to stimulate the economy in a countercyclical movement (Bosshardt & Cerutti, 2020;Choi et al, 2016), in the same time foreign-owned banks tend to decrease their lending behavior in a procyclical way during crises (Allen et al, 2013;Choi et al, 2016).…”