DP13456 Banks' Systemic Risk and Monetary Policy
Author(s): | Ester Faia, Soeren Karau |
Publication Date: | January 2019 |
Keyword(s): | DeltaCoVaR, leverage, LRMES, macroprudential policy, monitoring intensity, panel VAR, policy complementarities, proxy VAR, Risk-taking channel of monetary policy |
JEL(s): | E44, E52, G18, G21 |
Programme Areas: | Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=13456 |
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 time-series 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 macro-prudential policy has a significant role in taming the un-intended consequences of monetary policy on systemic risk.