Bank risk-taking and impaired monetary policy transmission

Philipp Koenig, Eva Schliephake

Research output: Working paperPreprint

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Abstract

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.<br>
Original languageEnglish
Number of pages42
DOIs
Publication statusPublished - 20 Sep 2021

Keywords

  • Monetary policy
  • Bank lending
  • Risk-taking channel
  • Reversal rate

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