Share This Article:

Banking Sector and Monetary Policy Transmission: Bank Capital, Credit and Risk-Taking Channels

Abstract Full-Text HTML XML Download Download as PDF (Size:475KB) PP. 77-86
DOI: 10.4236/me.2013.41010    6,497 Downloads   10,286 Views   Citations

ABSTRACT

In the literature, the question of central banks’ responsibility for triggering crises is raised when sustainable low interest rates lead to excessive banks’ risk exposures. However, such portfolio choices mainly depend on the various returns of assets and on the official interest rate, taking into account that the bank lending channel is affected by the bank capital channel. On the basis of a simple theoretical model including a solvency ratio, we show that during recessions a credit rationing is observed together with a flight to quality; during expansions monetary policy can induce both a fall in credit activity and an increase in financial instability. Then, regulatory capital arbitrages appear and still weaken productive loans. Conclusions can be drawn in terms of prudential policy, as the central bank may be powerless face to banking strategies if the regulatory framework is procyclical.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

P. Gilles, M. Gauvin and N. Huchet, "Banking Sector and Monetary Policy Transmission: Bank Capital, Credit and Risk-Taking Channels," Modern Economy, Vol. 4 No. 1, 2013, pp. 77-86. doi: 10.4236/me.2013.41010.

References

[1] B. Bernanke, M. Gertler and S. Gilchrist, “The Financial Accelerator and the Flight to Quality,” The Review of Economics and Statistics, Symposium on Developments in Business Cycles Research, Vol. 78, No. 1, 1996, pp. 1-15. doi:10.2307/2109844
[2] B. Bernanke, M. Gertler and S. Gilchrist, “The Financial Accelerator in a Quantitative Business Cycle Framework,” In: M. Woodford and J. Taylor, Eds., Handbook of Macroeconomics, Elsevier, Amsterdam, 1999, pp. 1341-1393.
[3] N. Kiyotaki and J. Moore, “Credit Cycles,” Journal of Political Economy, Vol. 105, No. 2, 1997.
[4] B. Bernanke and M. Gertler, “Should Central Banks Respond to Movements in Asset Prices?” The American Economic Review, Vol. 91, No. 2, 2001, pp. 253-257. doi:10.1257/aer.91.2.253
[5] A. Filardo, “Should Monetary Policy respond to Asset Price Bubbles? Some Experimental Results,” Federal Reserve Bank of Kansas Working Papers, 2001, Paper No. 01-04.
[6] S. G. Cecchetti, H. Genberg and S. Wadhwani, “Asset Prices in a Flexible Inflation Targeting Framework,” National Bureau of Economic Research Working Paper, 2002, Paper No. 8970.
[7] G. Levieuge, “Monetary Policy with financial Information,” Review of Political Economy, Vol. 113, No. 2, 2003, pp. 233-254.
[8] M. Brunnermeier and Y. Sannikov, “A Macroeconomic Model with a Financial Sector,” Working Paper Research, National Bank of Belgium, 2009.
[9] A. Gerali, S. Neri, L. Sessa and F. Signoretti, “Credit and Banking in a DSGE Model of the Euro Area,” Journal of Money Credit and Banking, Vol. 42, No. 6, 2010, pp. 107-141. doi:10.1111/j.1538-4616.2010.00331.x
[10] C. Meh and K. Moran, “The Role of Bank Capital in the Propagation of Shocks,” Bank of Canada Working Paper, 2010, Paper No. 08-36.
[11] D. Kohn, “Monetary Policy and Asset Prices Revisited,” Cato Journal, Vol. 29, No. 1, 2009, pp. 31-44.
[12] C. Walsh, “Using Monetary Policy to Stabilize Economic Activity,” Jackson Hole Symposium on Financial Stability and Macroeconomic Policy, 2009.
[13] R. Rajan, “Has Financial Development Made the World Riskier?” NBER Working Paper, 2005, Article ID: 11728.
[14] W. White, “Is Price Stability Enough?” BIS Working Papers, 2006, Paper No. 205.
[15] S. Fahr, R. Motto, M. Rostagno, F. Smet and P. Tristani, “A Monetary Policy Strategy in Good and Bad Times, Lessons from the Recent Past,” European Central Bank Working Paper, 2011, Paper No. 1336.
[16] B. Hobijn and F. Ravenna, “Loan Securitization and the Monetary Transmission Mechanism,” Work in Progress. http://ic.ucsc.edu/~fravenna/home/Hobijn_ravenna.pdf
[17] L. Gambacorta and D. Marques-Ibanez, “The Bank Lending Channel. Lessons from the Crisis,” BIS Working Papers, 2011, Paper No. 1335.
[18] S. V. den Heuvel, “Does Bank Capital Matter for Monetary Transmission?” Economic Policy Review, 2002, pp. 259-265.
[19] V. Bouvatier and L. Lepetit, “Bank Provision Channel and Credit Market Cyclicality,” Economic Review, Vol. 62, 2011, pp. 67-85.
[20] G. D’ Ariccia, D. Igan and L. Laeven, “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market,” IMF Working Paper, 2008, Article ID: 106.
[21] A. Korinek, “Systemic Risk-Taking, Amplification Effects, Externalities, and Regulatory Responses,” European Central Bank Working Paper, 2011, Paper No. 1345.
[22] A. Krishnamurthy, “Collateral Constraints and the Amplification Mechanism,” Journal of Economic Theory, Vol. 111, No. 2, 2003, pp. 277-292. doi:10.1016/S0022-0531(03)00098-X
[23] M. Ciccarelli, A. Maddaloni and J-L. Peydro, “Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy,” European Central Bank Working Paper, 2010, Paper No. 1228.
[24] Y. Altunbas, L. Gambacorta and D. Marqués-Ibanez, “Securitization and the Bank Lending Channel,” European Central Bank Working Paper, 2007, Article ID: 838.
[25] G. Jiménez, J. S. Salas, S. Ongena and J-L. Peydro, “Hazar-dous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk-Taking?” Banco de Espana Working Papers, 2009, Paper No. 0833.
[26] Y. Altunbas, L. Gambacorta and D. Marqués-Ibanez, “Does Monetary Policy Affect Bank Risk-Taking,” European Central Bank Working Paper, 2010, Paper No. 1166.
[27] C. Borio and H. Zhu, “Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?” BIS Working Papers, 2008, Paper No. 268.
[28] C. C. Riportella, R. S. Medina and A. T. Ponce, “What Drives Bank Securitization? The Spanish Experience,” Journal of Banking and Finance, Vol. 34, No. 11, 2010, pp. 2639-2651. doi:10.1016/j.jbankfin.2010.05.003
[29] J. Tirole, “Liquidity Shortages : Theoritical Underpinnings,” Review of Financial Stability, No. 11, 2008, pp. 57-69.
[30] P. Weill, “Leaning against the Wind,” Review of Economic Studies, No. 74, 2007, pp.1329-1354.
[31] W. White, “Should Monetary Policy ‘Lean or Clean?’” Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper, 2009, Paper No. 34.
[32] F. Covas and S. Fujita, “Time-Varying Capital Requirements in a General Equilibrium Model of Liquidity Dependence,” Federal Reserve Bank of Philadelphia Working Papers, 2009, Paper No. 09-23.
[33] P. N’ Diaye, “Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy,” IMF Working Paper, 2009, Paper No. 09/257.
[34] J. M. Blum, “Why ‘Basel II’ May Need a Leverage Ratio Restriction,” Journal of Banking and Finance, Vol. 32, 2008, pp. 1699-1707.
[35] A. Korinek, “Systemic Risk-Taking, Amplification Effects, Externalities, and Regulatory Responses,” European Central Bank Working Paper, 2011, Paper No. 1345.
[36] H. Minsky, “Can ‘It’ Happen Again? Essays on Instability and Finance,” M. E. Sharpe, New York, 1982.
[37] T. Adrian and H S. Shin, “Monetary Cycles, Financial Cycles, and the Business Cycle,” Federal Reserve Bank of New-York Staff Reports, 2010, Paper No. 421.
[38] C. Calmès and R. Théoret, “The Impact of Off-BalanceSheet Activities on Banks Returns: An Application if the ARCH-M to Canadian Data,” Journal of Banking and Finance, No. 34, 2010, pp. 1719-1728.
[39] R. Nijskens and W. Wagner, “Credit Risk Transfer Activities and Systemic Risk: How Banks Became Less Risky Individually but Posed Greater Risks to Financial System at the Same Time,” Journal of Banking and Finance, Vol. 35, No. 6, 2011, pp. 1391-1398. doi:10.1016/j.jbankfin.2010.10.001
[40] F. Warnock and V. Warnock, “International Capital Flows and U.S. Interest Rates,” NBER Working Paper, 2006, Paper No. 12560.
[41] C. Bastidon, P. Gilles and N. Huchet, “Amplification Effects and Unconventional Monetary Policies,” Theoretical and Applied Economics, Vol. XIX, No. 2, 2012, pp. 13-30.

  
comments powered by Disqus

Copyright © 2019 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.