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

Abstract

In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1−2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks' efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five

The distributional effects of conventional monetary policy and quantitative easing: Evidence from an estimated DSGE model

“…In addition, lower interest rates have been shown to result in reduced lending standards (Delis and Kouretas 2011; Maddaloni and Peydro 2011), higher leverage (de Groot 2014), as well as increased asset risks(Angeloni et al 2015). For the EA, expansionary monetary policy is associated with an increase in the willingness of banks to accept risk(Altunbas et al 2014;Jimenez et al 2014) and with lower lending standards(Neuenkirch and Noeckel 2018).…”

Shadow banks and the risk-taking channel of monetary policy transmission in the euro area

“…Two countries that consistently show the smallest responses of the risk assets ratio to either indicator are Luxembourg and the Netherlands. The finding for the Netherlands is somewhat surprising as the conventional banking sector is found to show the strongest risk-taking behavior among the ten euro area countries analyzed in Neuenkirch and Nöckel (2018). The case of Luxembourg reveals an interesting topic for further research.…”

“…Recent empirical literature has documented a risk-taking channel of monetary policy in the "conventional" banking sector. Lower interest rates are found to result in reduced lending standards, higher leverage, and increased asset risks in the United States (e.g., Maddaloni and Peydro 2011;Angeloni and Faia 2013;Angeloni et al 2015; Dell'Ariccia et al 2017) and the euro area (e.g., Maddaloni and Peydro 2011;Altunbas et al 2014;Jimenez et al 2014;Neuenkirch and Nöckel 2018). However, financial stability cannot be monitored by solely looking at the conventional banking sector anymore, as other parts of the financial system may also have a substantial influence (Rajan 2006).…”

“…However, less known is the fact that Lehman Brothers was a so-called "shadow bank," that is, a bank-like institution that does not take deposits and formally is not a bank. These types of financial institutions do not have access to central bank liquidity or deposit guarantees and are not constrained by the regulations imposed on traditional banks; hence, they remains in the shadows (Pozsar et al 2013).…”

Is the negative interest rate policy effective?

“…6 In addition, the NIRP can also impact the risk-taking behavior of banks. However, currently the evidence of the NIRP effect on banks' risk-taking provided by the existing literature is mixed (Arce et al, 2018;Neuenkirch and Nöckel, 2018;Demiralp et al, 2019;Heider et al, 2019;Tan, 2019;Bottero et al, 2019).…”