Hazardous Times for Monetary Policy

What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?

G. Jiminez, S. Ongena, J. Saurina

Research output: Working paperDiscussion paperOther research output

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Abstract

We investigate the impact of the stance and path of monetary policy on the level of credit risk of individual bank loans and on lending standards. We employ the Credit Register of the Bank of Spain that contains detailed monthly information on virtually all loans granted by all credit institutions operating in Spain during the last twenty-two years – generating almost twenty-three million bank loan records in total. Spanish monetary conditions were exogenously determined during the entire sample period. Using a variety of duration models we find that lower short-term interest rates prior to loan origination result in banks granting more risky new loans. Banks also soften their lending standards – they lend more to borrowers with a bad credit history and with high uncertainty. Lower interest rates, by contrast, reduce the credit risk of outstanding loans. Loan credit risk is maximized when both interest rates are very low prior to loan origination and interest rates are very high over the life of the loan. Our results suggest that low interest rates increase bank risk-taking, reduce credit risk in banks in the very short run but worsen it in the medium run. Risk-taking is not equal for all type of banks: Small banks, banks with fewer lending opportunities, banks with less sophisticated depositors, and savings or cooperative banks take on more extra risk than other banks when interest rates are lower. Higher GDP growth reduces credit risk on both new and outstanding loans, in stark contrast to the differential effects of monetary policy.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages35
Volume2007-75
Publication statusPublished - 2007

Publication series

NameCentER Discussion Paper
Volume2007-75

Fingerprint

Bank loans
Monetary policy
Credit risk
Loans
Interest rates
Lending
Credit
Spain
Short-term interest rates
Uncertainty
Loan rates
Duration models
Risk taking
Bank risk taking
GDP growth
Short-run
Savings

Keywords

  • monetary policy
  • low interest rates
  • financial stability
  • lending standards
  • credit risk
  • risk-taking
  • business cycle
  • bank organization
  • duration analysis

Cite this

Jiminez, G., Ongena, S., & Saurina, J. (2007). Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk? (CentER Discussion Paper; Vol. 2007-75). Tilburg: Finance.
Jiminez, G. ; Ongena, S. ; Saurina, J. / Hazardous Times for Monetary Policy : What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?. Tilburg : Finance, 2007. (CentER Discussion Paper).
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Jiminez, G, Ongena, S & Saurina, J 2007 'Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?' CentER Discussion Paper, vol. 2007-75, Finance, Tilburg.

Hazardous Times for Monetary Policy : What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk? / Jiminez, G.; Ongena, S.; Saurina, J.

Tilburg : Finance, 2007. (CentER Discussion Paper; Vol. 2007-75).

Research output: Working paperDiscussion paperOther research output

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AB - We investigate the impact of the stance and path of monetary policy on the level of credit risk of individual bank loans and on lending standards. We employ the Credit Register of the Bank of Spain that contains detailed monthly information on virtually all loans granted by all credit institutions operating in Spain during the last twenty-two years – generating almost twenty-three million bank loan records in total. Spanish monetary conditions were exogenously determined during the entire sample period. Using a variety of duration models we find that lower short-term interest rates prior to loan origination result in banks granting more risky new loans. Banks also soften their lending standards – they lend more to borrowers with a bad credit history and with high uncertainty. Lower interest rates, by contrast, reduce the credit risk of outstanding loans. Loan credit risk is maximized when both interest rates are very low prior to loan origination and interest rates are very high over the life of the loan. Our results suggest that low interest rates increase bank risk-taking, reduce credit risk in banks in the very short run but worsen it in the medium run. Risk-taking is not equal for all type of banks: Small banks, banks with fewer lending opportunities, banks with less sophisticated depositors, and savings or cooperative banks take on more extra risk than other banks when interest rates are lower. Higher GDP growth reduces credit risk on both new and outstanding loans, in stark contrast to the differential effects of monetary policy.

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