Monetary Policy, Risk-Taking, and Pricing

Evidence from a Quasi-Natural Experiment

V. Ioannidou, S. Ongena, J.L. Peydro

Research output: Working paperDiscussion paperOther research output

Abstract

We analyse the impact of monetary policy on bank risk-taking and pricing. Bolivia provides us with an excellent experimental setting to identify this impact. Its small economy is not synchronized with the US economy but its banking system is almost fully dollarized. Consequently the US federal funds rate is the appropriate measure of monetary policy. We study the impact of the federal funds rate on the riskiness and pricing of new bank loans granted in Bolivia between 1999 and 2003, a period of significant variation in the federal funds rate. We find robust evidence that a decrease in the US federal funds rate prior to loan origination raises the monthly probability of default on individual bank loans. We also find that initiating loans with a subprime credit rating or loans to riskier borrowers with current or past non-performance become more likely when the federal funds rate is low. However, loan spreads do not increase, seemingly even decrease, in changes in the probability of default. Hence banks do not seem to price the additional risk taken. Furthermore, banks with more liquid assets and less funds from foreign financial institutions take more risk when the federal funds rate is low, and reduce loan spreads more despite the additional risk they seemingly take.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages45
Volume2009-04 S
DOIs
Publication statusPublished - 2009

Publication series

NameEBC Discussion Paper
Volume2009-04 S

Fingerprint

Federal funds rate
Natural experiment
Risk taking
Monetary policy
Pricing
Loans
Bolivia
Bank loans
Probability of default
Credit rating
Assets
Riskiness
Small economies
Financial institutions
US economy
Banking system
Subprime
Bank risk taking

Keywords

  • monetary policy
  • federal funds rate
  • lending standards
  • credit risk
  • subprime borrowers
  • duration analysis

Cite this

Ioannidou, V., Ongena, S., & Peydro, J. L. (2009). Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment. (EBC Discussion Paper; Vol. 2009-04 S). Tilburg: EBC. https://doi.org/10.2139/ssrn.1406423
Ioannidou, V. ; Ongena, S. ; Peydro, J.L. / Monetary Policy, Risk-Taking, and Pricing : Evidence from a Quasi-Natural Experiment. Tilburg : EBC, 2009. (EBC Discussion Paper).
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Ioannidou, V, Ongena, S & Peydro, JL 2009 'Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment' EBC Discussion Paper, vol. 2009-04 S, EBC, Tilburg. https://doi.org/10.2139/ssrn.1406423

Monetary Policy, Risk-Taking, and Pricing : Evidence from a Quasi-Natural Experiment. / Ioannidou, V.; Ongena, S.; Peydro, J.L.

Tilburg : EBC, 2009. (EBC Discussion Paper; Vol. 2009-04 S).

Research output: Working paperDiscussion paperOther research output

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Ioannidou V, Ongena S, Peydro JL. Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment. Tilburg: EBC. 2009. (EBC Discussion Paper). https://doi.org/10.2139/ssrn.1406423