Bank risk-taking and impaired monetary policy transmission
We consider a standard banking model with agency frictions to simultaneously study the weakening and reversal of monetary transmission and banks’ risk-taking in a low-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks’ net wo...
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| Format: | preprint |
| Language: | eng |
| Published: |
2021
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| Online Access: | http://hdl.handle.net/10400.14/36172 |
| Country: | Portugal |
| Oai: | oai:repositorio.ucp.pt:10400.14/36172 |
| Summary: | We consider a standard banking model with agency frictions to simultaneously study the weakening and reversal of monetary transmission and banks’ risk-taking in a low-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks’ net worth.The pass-through to deposit rates, the level of excess reserves and the extent of the agency problem between banks and depositors are crucial determinants of monetary transmission. If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policy rates below the reversal rate further interest rate reductions lead to a disproportionate increase in risk-taking and a contraction in loan supply. |
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