Faculty of Economics and Business Administration Publications Database

Monetary policy and risk taking

Angeloni, Ignazio
Lo Duca, Marco
Volume: 52
Pages: 285 - 307
Month: March
ISSN-Print: 0165-1889
Link External Source: Online Version
Year: 2015
Keywords: Bank runs; Risk taking; Monetary policy

We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel – monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and is particularly significant on the bank funding side. Then, to rationalize this evidence we build a macroeconomic model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.