Paper #1704

Title:

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

Authors:

Vasso Ioannidou, Steven Ongena and José-Luis Peydró

Date:

September 2007 (Revised: October 2008)

Abstract:

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.

Keywords:

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

JEL codes:

E44, E5, G01, G21, G28, L14.

Area of Research:

Finance and Accounting

Published in:

Review of Finance, 19(1), 2015, 95-144

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