Monetary policy, risk taking, and pricing : evidence from a quasi-natural experiment

Ioannidou, Vasso and Ongena, Steven and Peydró, José Luis (2015) Monetary policy, risk taking, and pricing : evidence from a quasi-natural experiment. Review of Finance, 19 (1). pp. 95-144. ISSN 1572-3097

Abstract

We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the USA. We find that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking, we assess collateral coverage, expected returns, and risk premia of the newly granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems.