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

Quantitative Easing and Its Implications on Private Equity in the Euro Area

“…Second, since QE apparently is associated with lower nominal returns, investors can be prompted to move towards higher risk. Likewise, higher asset prices usually go hand in hand with credit expansion and higher income streams and, thus, might lead to a lower risk perception (Borio and Zhu 2012).Numerous studies identify an elevated risk appetite of banks when interest rates are declining (Jiménez et al 2014;Neuenkirch and Nöckel 2018;Abbate and Thaler 2019). A further risk appears if large-scale asset purchases of the ECB reverse to huge impairments if interest rates rise.…”

“…Although risk taking is an intended outcome of QE, an excessive appetite combined with a lack of discipline and diligence might cause adverse effects (Dell'Ariccia et al 2018). Prior literature delivers evidence for excessive risk taking when interest rates are low (Abbate and Thaler 2019;Lian et al 2019).…”