Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Author: Griffoli Tommaso Mancini and Narita Machiko

Volume/Issue: Volume 2017 Issue 065

Publication date: March 2017

ISBN: 9781475588644

$20.00

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Topics covered in this book

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Banks and Banking , Finance , Money and Monetary Policy , WP , monetary policy , monetary policy easing , interest rate , quarter , Banks , nonbank financial institutions , prolonged monetary policy easing , financial vulnerability , financial stability , risk-taking behavior , spillovers , nonbank leverage , asset-to-equity leverage ratio , monetary policy transmission mechanisms , financial institution leverage , leverage benchmark , monetary policy impulse , Financial sector risk , Investment banking , Asset management , Bond yields , Accommodative monetary policy , Global , Africa

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Summary

Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.