Monetary Policy and the Asset Risk‐Taking Channel

Abstract

Research Question The recent financial crisis has marked the importance of understanding the different types of risk to which the financial sector, and ultimately the real economy, are exposed. In particular, monetary policy might influence financial sector risk through the so called risk-taking channel, i.e. the mechanism by which low levels of the risk-free interest rate induce financial institutions to make riskier investments. We explore the functioning and relevance of this channel using a quantitative macroeconomic model, and assess whether the monetary authority should take its influence on bank asset risk into account when setting the interest rate

The Risk-Taking Channel of Monetary Policy Transmission in the Euro-Area

“…The responses of both credit variables are consistent with the findings of other VAR papers dealing specifically with the United States (Abbate and Thaler 2015;Afanasyeva and G üntner 2014). The impulse responses for lending standards show that after a slight increase on impact, there is a downward adjustment that is significant even when considering the conservative 95% confidence bands.…”

“…1 Recent empirical papers provide evidence for the existence of a risk-taking channel in the United States. Lower interest rates result in reduced lending standards (Abbate and Thaler 2015;Angeloni and Faia 2013;Delis and Kouretas 2011;Maddaloni and Peydr ó 2011), higher leverage (de Groot 2014; Adrian and Shin 2014), and increased asset risks (Angeloni et al 2015). In addition, Dell 'Ariccia et al (2014) provide a theoretical foundation for a link between the degree of risk-taking and a bank's capital structure.…”

The risk-taking channel of monetary policy transmission in the euro area

“…1 Recent empirical papers provide evidence for the existence of a risk-taking channel in the United States. Lower interest rates result in reduced lending standards (Abbate and Thaler 2015;Angeloni and Faia 2013;Delis and Kouretas 2011;Maddaloni and Peydró 2011), higher leverage (de Groot 2014; Adrian and Shin 2014), and increased asset risks (Angeloni et al 2015). In addition, Dell'Ariccia et al (2014) provide a theoretical foundation for a link between the degree of risk-taking and a bank's capital structure.…”

Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment

“…Borio and Zhu (2012) describe this as the risk-taking channel of monetary policy. Recent empirical studies have already shed some light on its functioning (Angeloni et al, 2014;Abbate and Thaler, 2015;Gilbert et al, 2018, to name a few). Borio (2014a) claims that accumulation of financial disequilibrium occurs most often during positive supply shocks, which push down prices while enhancing optimistic expectations and investment into riskier assets.…”