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Sectoral credit reallocation: An excessive bank risk-taking explanation

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  • Pozo, Jorge

Abstract

This paper develops a theoretical model to provide an alternative explanation for the credit to nontradable sector growing faster than credit to tradable sector, after a US expansionary monetary policy, based on an excessive risk-taking channel. This is, a reduced foreign interest rate decreases bank default probability, which in turn diminishes banks’ incentives to take excessive risk. This produces a reallocation of loan supply to nontradable sector since tradable loans are riskier. Using monthly sectoral credit data at the bank level for the Peruvian economy in the 2004–2019 period, we find evidence of the excessive bank risk-taking channel on sectoral credit reallocation.

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  • Pozo, Jorge, 2023. "Sectoral credit reallocation: An excessive bank risk-taking explanation," Emerging Markets Review, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ememar:v:54:y:2023:i:c:s1566014122000899
    DOI: 10.1016/j.ememar.2022.100972
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    More about this item

    Keywords

    Nontradable loans; Tradable loans; Real exchange rate; Bank risk-taking; Open economy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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