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

Zhang, Z, Clovis, J ORCID: https://orcid.org/0000-0001-7390-9117, Moffatt, P and Wang, W, 2024. From theory to practice: monetary policy transmission and bank risk dynamics. PLoS ONE, 19 (4): e0299209. ISSN 1932-6203

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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:	Journal article
Alternative Title:	Monetary policy transmission and bank risk dynamics
Publication Title:	PLoS ONE
Creators:	Zhang, Z., Clovis, J., Moffatt, P. and Wang, W.
Publisher:	Public Library of Science
Date:	18 April 2024
Volume:	19
Number:	4
ISSN:	1932-6203
Identifiers:	Number Type 10.1371/journal.pone.0299209 DOI 1866270 Other
Rights:	This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
Divisions:	Schools > Nottingham Business School
Record created by:	Jonathan Gallacher
Date Added:	23 Sep 2024 08:47
Last Modified:	23 Sep 2024 08:47
URI:	https://irep.ntu.ac.uk/id/eprint/52271

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