From theory to practice: Monetary policy transmission and bank risk dynamics

Moffatt, Peter, Zhang, Zheng, Clovis, Joel and Wang, Wenxue (2024) From theory to practice: Monetary policy transmission and bank risk dynamics. PLoS One. ISSN 1932-6203 (In Press)

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Abstract

This paper investigates the relationship between monetary policy and bank risk-taking by introducing a model wherein banks expend a level of costly monitoring effort to select low-risk projects, thereby reducing the risk associated with the loans they grant. The impact of monetary policy on bank risk-taking is examined through both theoretical models and empirical analysis. The paper compares theoretical models with different assumptions, revealing an unambiguous negative effect without the assumption of limited liability for banks, and an ambiguous effect with the assumption of limited liability for banks, influenced by the equity ratio. The empirical model employs unique quarterly data comprising balance sheet information for top-listed banks in the U.S. banking system from 2000 to 2017. The findings indicate that low-interest rates contribute to an increase in bank risk-taking. Moreover, this effect is more pronounced after the financial crisis and weaker before the crisis. Additionally, the impact is evident for undercapitalized banks and more substantial for those financed with a higher proportion of equity.

Item Type: Article
Faculty \ School: Faculty of Social Sciences
Faculty of Social Sciences > School of Economics
UEA Research Groups: Faculty of Medicine and Health Sciences > Research Centres > Norwich Institute for Healthy Aging
Faculty of Social Sciences > Research Centres > Centre for Behavioural and Experimental Social Sciences
Faculty of Social Sciences > Research Groups > Applied Econometrics And Finance
Faculty of Social Sciences > Research Groups > Behavioural Economics
Depositing User: LivePure Connector
Date Deposited: 12 Mar 2024 13:31
Last Modified: 12 Mar 2024 14:30
URI: https://ueaeprints.uea.ac.uk/id/eprint/94657
DOI:

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