The risk-taking channel of monetary policy: exploring all avenues Discussion, MPC TF Research Workshop, 2 February 2018 Jan Willem van den End

Contribution Panel regressions, covering multiple dimensions… individual bank, borrower & loans characteristics ex-ante & ex-post credit quality (at origination & over time) intensive & extensive margin (existing & new loans) … strengthen identification and nuance outcomes risk-taking only found at extensive margin most obvious for banks with low capital, high liquidity buffers

Sample period Sample period 1999-2007 because “mon pol in this period was exogenous to PT economy” and was a “normal period” entering EMU was shift from one equilibrium to another (not a normal period) financial conditions driven by sovereign risk spread (which is not exogenous to PT economy) different post-crisis state (ZLB, UMP, Basel 3, 3.5) has affected bank behaviour calls for caution wrt policy conclusions

Misallocation Risk-taking should be put in wider context that led to misallocation of resources capital flows, falling interest rates & risk spreads, fading FX risk, asset price boom  affected bank behaviour Cette et al. (EER, 2016), Gopinath et al. (QJE, 2017) so its not only risk-taking by domestic banks, but a shift to another equilibrium, giving rise to misallocation

Misallocation through bank lending Suggestion: identify evergreening by looking at loans performing with forbearance Source: Andrews & Petroulakis (2017)

Liquidity buffers Finding that banks with high liquidity buffers more likely engage in risk-taking not in line with intuition liquidity buffers raise loan rates and lower lending (BCBS/MAG, 2010) Finding perhaps due for environment with strong search for yield, but cannot be generalized

Dif-in-dif Do loans granted when policy rates are low more likely default when rates increase?  dif-in-dif Issue: comparability of treated & control group of loans doubtful whether very short window solves it likely that banks take into account changing rate expectations in lending behaviour, e.g. in non-price conditions selection bias in loans granted in the two periods suggestion: propensity score matching