Monetary Policy and Risk Taking

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Highlights• The financial and economic crisis has taught central banks a lesson. They were previously primarily concerned with maintaining price stability, but the crisis has produced evidence to show that monetary policy can contribute to the development (or the mitigation) of systemic risk in the financial sector. Monetary policy therefore needs to take financial stability implications into account, and the macroeconomic implications of bank supervision and regulation must also be considered.• It is therefore important to understand the linkages between financial risk, monetary policy and the business cycle. This paper considers the thinking to date on risk taking in monetary policy, presents comparative evidence for the euro area and the United States, and interprets the evidence using a macro dynamic stochastic general equilibrium model.• This approach produces three preliminary conclusions: central banks' monetary policy approaches affect, with time lags, the propensity of financial markets and banks to assume risk; it is possible to take account of these effects through macroeconomic models that embody optimising agents with limited information and include explicitly banking and financial sectors; and there is some indication that the modelling done in the paper can be used as the basis for predicting the relationship between monetary policy and the effect of risk on macroeconomic variables, though this area needs considerable further research. AbstractWe assess, through VAR evidence, the effects of monetary policy on banks' risk exposure and find the presence of a risk-taking channel. A model combining fragile banks prone to risk mis-incentives and credit constrained firms, whose collateral fluctuations generate a balance sheet channel, is used to rationalize the evidence. A monetary expansion increases bank leverage. With two consequences: on the one side this exacerbates risk exposure; on the other, the risk spiral depresses output, therefore dampening the conventional amplification effect of the financial accelerator.

Monetary Policy, Private Debt and Financial Stability Risks

“…In this exercise, for all the initial debt-to-GDP gap values considered, we set the country …xed e¤ect parameters to their cross-country mean value. Next, given the cumulative responses of the debt-to-GDP ratio (in deviation from trend), 8 we can compute the value of the debtto-GDP gap after the shock, and the corresponding probability of a …nancial crisis. Finally, by comparing the probability of a …nancial crisis before and after the shock we can assess whether the tightening has resulted in an increase or a decrease in …nancial stability risks.…”

The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle

“…11 To study how such managerial agency problems can have an effect on bank policies, we model the agency problem within banks explicitly. Let e denote the unobservable effort level of the manager, such that e ∈ {e L , e H }, where e H > e L .…”

“…Following Dye (1986) we assume that audit costs are increasing in output: z 0 ³Π´> 0. 12 Let φ denote the probability of conducting an audit and let ζ denote the probability that the manager is inferred to be over-lending and 11 See Chapter 8 of Acharya and Richardson (2009b), which contains a detailed account of governance and management failures at a number of financial institutions. The most detailed evidence is for UBS based on its "Shareholder Report on UBS's Write Downs" prepared in 2008 for the Swiss Federal Banking Commission.…”

“…Let μ 1 , μ 2 , μ i 3 denote the Lagrange multipliers for constraints (11), (12) and (13) respectively. Taking the FOC wrt w(L) we get…”

Monetary Policy and Defaults in the US

“…This has been done using either microeconomic data (for example by Jimenez et al, 2014, Maddaloni and Peydro, 2013and Altunbas et al, 2014 or aggregate variations in credit standards (Buch et al, 2014a andAfanasyeva andGüntner, 2014) and leverage (Angeloni et al, 2015). The present paper does not directly inspect the risk taking channel of monetary policy, which relates to an ex ante incentive by banks to issue new loans and would require a different type of data.…”