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Monetary policy, risk-taking and pricing: Evidence from a quasi-natural experiment

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We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the US. We find that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking we assess collateral coverage, expected returns and risk premia of the newly-granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems.

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  • Vasso Ioannidou & Steven Ongena & José-Luis Peydró, 2007. "Monetary policy, risk-taking and pricing: Evidence from a quasi-natural experiment," Economics Working Papers 1704, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
    • Handle: RePEc:upf:upfgen:1704
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    More about this item

    Keywords

    Monetary policy; low short-term interest rates; softening lending standards; credit risk; liquidity risk; subprime borrowers; bank agency problems; duration analysis.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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