Forward Looking Loan Provisions: Credit Supply and Risk-Taking

Morais, Bernardo; Ormazábal, Gaizka; Peydró, José‐Luis; Roa, Monica; Sarmiento, Miguel

doi:10.2139/ssrn.3702303

Cited by 5 publications

(6 citation statements)

References 40 publications

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“…In line with the results in Table 2, we find that loan rates of the new credit granted by banks with higher credit risk exposition react more to monetary policy changes than those for banks with less credit exposition (column 4). That is, banks with risky portfolios increase/reduce their loan rates in tightening/loosening periods, compared banks with less risky portfolios (consistent with the view that banks with higher credit risk exposition seem to be more procyclical (Laeven and Majnoni, 2003;Huizinga and Laeven, 2019;Morais et al, 2020).…”

Section: 1the Bank Lending Channel Of Monetary Policysupporting

confidence: 58%

“…Note that the credit expansion in recent years has not been accompanied by a rising trend in the doubtful loans' ratio (Figure 2). This downward trend in the banks' credit risk can be attributed to more robust macroprudential policies in the domestic avenue (i.e., loan provisions based on expected losses rather than on incurred losses) and oversight of the financial system's constituents, which ultimately have led them to tightening lending standards and to the putting in place of necessary controls to handle the different risks these institutions face (see, Gómez et al, 2020;Morais et al, 2020). Overall, our descriptive analysis suggests that domestic banks show a higher procyclical behaviour than international banks and are more sensitive to monetary policy changes.…”

Section: Datamentioning

confidence: 99%

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The internationalization of domestic banks and the credit channel of monetary policy

Morales

Osório

Lemus

et al. 2022

Journal of Banking & Finance

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Section: 1the Bank Lending Channel Of Monetary Policysupporting

confidence: 58%

Section: Datamentioning

confidence: 99%

The internationalization of domestic banks and the credit channel of monetary policy

Morales

Osório

Lemus

et al. 2022

Journal of Banking & Finance

Self Cite

View full text Add to dashboard Cite

show abstract

Section: 1the Bank Lending Channel Of Monetary Policysupporting

confidence: 58%

The internationalization of domestic banks and the credit channel of monetary policy

Morales¹,

Osório²,

Lemus³

et al. 2021

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How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.

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“…In addition, in May 2007, there was a change in the rule for computing banks' loan losses provisions, based on expected rather than incurred losses. Throughout the paper, we show that our findings are not significantly affected by such policy change (whose effects are investigated by López, Tenjo andZárate, 2014, andMorais et al, 2020). corporate loans, with information on loan volume and other loan characteristics.…”

Section: Data and Summary Statisticsmentioning

confidence: 65%

Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy

Fabiani¹,

López²,

Peydró³

et al. 2021

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We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels

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Forward Looking Loan Provisions: Credit Supply and Risk-Taking

Cited by 5 publications

References 40 publications

The internationalization of domestic banks and the credit channel of monetary policy

The internationalization of domestic banks and the credit channel of monetary policy

The internationalization of domestic banks and the credit channel of monetary policy

Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy

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