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Monetary Policy Effects On Bank Risk Taking
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Book Synopsis Bank Leverage and Monetary Policy's Risk-Taking Channel by : Mr.Giovanni Dell'Ariccia
Download or read book Bank Leverage and Monetary Policy's Risk-Taking Channel written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2013-06-06 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
Book Synopsis Bank Leverage and Monetary Policy's Risk-Taking Channel by : Mr.Giovanni Dell'Ariccia
Download or read book Bank Leverage and Monetary Policy's Risk-Taking Channel written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2013-06-06 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
Book Synopsis Monetary Policy and Bank Risk-Taking by : Mr.Giovanni Dell'Ariccia
Download or read book Monetary Policy and Bank Risk-Taking written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2010-07-27 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper contributes to the current debate on what role financial stability considerations should play in monetary policy decision and how best to integrate macro-prudential and monetary policy frameworks. The paper broadly supports the view that monetary policy easing induces greater risk-taking by banks but also shows that the relationship between real interest rates and banking risk is more complex. Ultimately, it depends on how much skin in the game banks have. The central message of the paper is broadly complementary to those in the recent MCM board paper “Central Banking Lessons from the Crisis.”
Book Synopsis Bank Profitability and Risk-Taking by : Natalya Martynova
Download or read book Bank Profitability and Risk-Taking written by Natalya Martynova and published by International Monetary Fund. This book was released on 2015-11-25 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.
Book Synopsis Monetary Policy, Leverage, and Bank Risk Taking by : Mr.Luc Laeven
Download or read book Monetary Policy, Leverage, and Bank Risk Taking written by Mr.Luc Laeven and published by International Monetary Fund. This book was released on 2010-12-01 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.
Book Synopsis Does Monetary Policy Affect Bank Risk-taking? by : Yener Altunbas
Download or read book Does Monetary Policy Affect Bank Risk-taking? written by Yener Altunbas and published by . This book was released on 2010 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls.
Book Synopsis (Un)Conventional Monetary Policy and Bank Risk-Taking by : Sophie Brana
Download or read book (Un)Conventional Monetary Policy and Bank Risk-Taking written by Sophie Brana and published by . This book was released on 2018 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the effect of monetary policy - especially unconventional monetary policy - on bank risk-taking behavior in Europe over the period 2000-2015. Using a dynamic panel model with a threshold effect, we estimate this effect on two measures of bank risk: the Distance to Default, which reflects the market perception of risk, and the asymmetric Z-score, which corresponds to an accounting-based measure of the risk. We find that loosening monetary policy via low interest rates and increasing central banks' liquidity has a harmful effect on banks' risk, confirming the existence of the risk-taking channel. Moreover, we show that this relationship is nonlinear, i.e., with the sustainable implementation of unconventional monetary policies, the effects are stronger below a certain threshold.
Book Synopsis Monetary Policy Effects on Bank Risk Taking by : Angela Abbate
Download or read book Monetary Policy Effects on Bank Risk Taking written by Angela Abbate and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Managing the Sovereign-Bank Nexus by : Mr.Giovanni Dell'Ariccia
Download or read book Managing the Sovereign-Bank Nexus written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2018-09-07 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Book Synopsis Risk Taking and Interest Rates by : Seung Jung Lee
Download or read book Risk Taking and Interest Rates written by Seung Jung Lee and published by International Monetary Fund. This book was released on 2017-02-10 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study how low interest rates in the United States affect risk taking in the market of crossborder leveraged corporate loans. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of a cross-border spillover effect of monetary policy. We find that before the crisis, lenders made ex-ante riskier loans to non- U.S. borrowers in response to a decline in short-term U.S. interest rates, and, after it, in response to a decline in longer-term U.S. interest rates. Economic uncertainty and risk appetite appear to play a limited role in explaining ex-ante credit risk. Our results highlight the potential policy challenges faced by central banks in affecting credit risk cycles in their own jurisdictions.
Book Synopsis Bank Risk-Taking and Competition Revisited by : Mr.Gianni De Nicolo
Download or read book Bank Risk-Taking and Competition Revisited written by Mr.Gianni De Nicolo and published by International Monetary Fund. This book was released on 2006-12-01 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend.
Book Synopsis Bank Size and Systemic Risk by : Mr.Luc Laeven
Download or read book Bank Size and Systemic Risk written by Mr.Luc Laeven and published by International Monetary Fund. This book was released on 2014-05-08 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: The proposed SDN documents the evolution of bank size and activities over the past 20 years. It discusses whether this evolution can be explained by economies of scale or “too big to fail” subsidies. The paper then presents evidence on the extent to which bank size and market-based activities contribute to systemic risk. The paper concludes with policy messages in the area of capital regulation and activity restrictions to reduce the systemic risk posed by large banks. The analysis of the paper complements earlier Fund work, including SDN 13/04 and the recent GFSR chapter on “too big to fail” subsidies, and its policy message is in line with this earlier work.
Book Synopsis Powering the Digital Economy: Opportunities and Risks of Artificial Intelligence in Finance by : El Bachir Boukherouaa
Download or read book Powering the Digital Economy: Opportunities and Risks of Artificial Intelligence in Finance written by El Bachir Boukherouaa and published by International Monetary Fund. This book was released on 2021-10-22 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper discusses the impact of the rapid adoption of artificial intelligence (AI) and machine learning (ML) in the financial sector. It highlights the benefits these technologies bring in terms of financial deepening and efficiency, while raising concerns about its potential in widening the digital divide between advanced and developing economies. The paper advances the discussion on the impact of this technology by distilling and categorizing the unique risks that it could pose to the integrity and stability of the financial system, policy challenges, and potential regulatory approaches. The evolving nature of this technology and its application in finance means that the full extent of its strengths and weaknesses is yet to be fully understood. Given the risk of unexpected pitfalls, countries will need to strengthen prudential oversight.
Book Synopsis Interest Rates and the Bank Risk-Taking Channel by : Giovanni Dell'Ariccia
Download or read book Interest Rates and the Bank Risk-Taking Channel written by Giovanni Dell'Ariccia and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The recent global financial crisis has brought the debate on how interest rates affect bank risk-taking to center stage. Proponents of this new risk-taking channel of monetary policy have argued that the low interest-rate environment in the run-up to the crisis may have created incentives for banks to take on excessive leverage and lower their lending standard, thus weakening bank portfolios. There is growing empirical evidence supporting this view. In contrast, this link has been little studied from a theoretical standpoint, leaving somewhat of a hole in our understanding of why (and how) banks' decisions concerning the overall risk of their portfolios, and their capital structures, may be influenced by changes in the interest rate environment and, by extension, policy choices (e.g., monetary policy) that affect it. We summarize some of the emerging literature on this topic (both empirical and theoretical), as well as some of the more classical work on related topics. We also present a simple model that illustrates various channels through which bank risk-taking is affected by the interest rate environment in which banks operate. We use that model to analyze the likely effect of various other forces. Given the wealth of evidence that interest rates may have a real effect through banks' portfolio decisions, it is important for policymakers to better understand the channel through which real interest rates operate on banks' decision-making.
Book Synopsis Monetary Policy and Bank Risk-taking by : Paul Gaggl
Download or read book Monetary Policy and Bank Risk-taking written by Paul Gaggl and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I study whether expansive monetary policy over an extended period under benign economic conditions induces banks to shift their asset portfolios toward more risky investments. This may contribute to aggregate financial instability. Moreover, I investigate whether such a portfolio adjustment is also likely to be highly correlated among financial institutions. The second phenomenon not only leads to more individual risk but also contributes to systemic risk. I believe these are relevant policy questions for at least two reasons: First, the financial crisis of 2007-08 had a devastating impact on the world economy. Thus, it is important to investigate the role that monetary policy played for the extreme buildup of aggregate risk throughout the mid 2000s. I find that the period of expansive ECB monetary policy in the period 2003-2005 induced banks to significantly increase the default risk allowed in their loan portfolios. Second, policy interest rates across the world are currently very low. My theoretic and empirical research suggests that a significant improvement in economic conditions together with expansive monetary policy could spur another round of excessive risk buildup in financial institutions' asset portfolios. Furthermore, one of the greatest concerns during the financial crisis of 2007-08 was systemic risk within the financial sector. Thus, I ask whether financial institutions intentionally choose portfolios that are highly correlated with their competitors. Based on an extensive matched firm-bank panel I construct multiple time varying measures of bank herding within the Austrian business loan market during 2000-08. I show that bank herding in business lending markets was sizable and significant throughout the period 2000-08. Moreover, banks' tendency to herd into default-risk classes was especially pronounced during the low policy interest rate period 2003-05. This suggests that not only do low and stable monetary policy interest rates encourage more bank risk-taking, but the additional risk is also likely to be correlated across banks.
Book Synopsis International Convergence of Capital Measurement and Capital Standards by :
Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Threats to International Financial Stability by : Richard Portes
Download or read book Threats to International Financial Stability written by Richard Portes and published by CUP Archive. This book was released on 1987-07-09 with total page 332 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume, based on conference organized by the International Center for Monetary and Banking Studies in association with the Centre for Economic Policy Research, brings together a leading group of economists, financial theorists, policy-makers and bankers to analyse threats to international financial stability. The potential fragility of the international financial and monetary system has been highlighted by recent international debt crises as well as by rapid financial innovation and important regulatory changes. The book examines the anatomy and propagation of international financial crises, assesses the adequacy of current regulatory and supervisory practices, and suggests measures that would help to avoid or contain financial crises. the papers, written by academics, are discussed by leading bank supervisors and regulators and by central and private bankers. The volume offers a unique combination of analytical rigour and practical relevance and will interest all those concerned with the stability of the international financial system.
