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Discussion Paper Details

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Title: Systemic Bank Risk and Monetary Policy

Author(s): Ester Faia and Soeren Karau

Publication Date: January 2019

Keyword(s): DeltaCoVaR, leverage, LRMES, macroprudential policy, monitoring intensity, panel VAR, policy complementarities, proxy VAR and Risk-taking channel of monetary policy

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and timeseries evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macroprudential policy has a significant role in taming the unintended consequences of monetary policy on systemic risk.

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Bibliographic Reference

Faia, E and Karau, S. 2019. 'Systemic Bank Risk and Monetary Policy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13456