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Bank Leverage and Monetary Policy's Risk‐Taking Channel: Evidence from the United States
Author(s) -
DELL'ARICCIA GIOVANNI,
LAEVEN LUC,
SUAREZ GUSTAVO A.
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12467
Subject(s) - leverage (statistics) , monetary policy , monetary economics , business , financial distress , financial system , ex ante , business cycle , interest rate , finance , economics , macroeconomics , machine learning , computer science
We present evidence of a risk‐taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve's Survey of Terms of Business Lending. We find that ex ante risk‐taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short‐term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress.