How does monetary policy impact the risk-taking behavior of banks, and to what extent do differences across banks influence this relationship?

Abstract

This thesis examines the impact of monetary policy (MP) on banks' risk-taking behavior, particularly during periods of unconventional monetary policies (UMP). Focusing on the post-Global Financial Crisis (GFC) era, the study assesses how MP changes influence bank lending and risk profiles and the role of bank-specific characteristics (e.g., size, equity ratios) in this relationship. Using a robust econometric framework combining High-Frequency Identification (HFI) and Local Projections (LP) models, the research analyzes MP shocks using high-frequency data from the Euro Area Monetary Policy Database (EA-MPD) and bank-specific metrics like Loan to Asset (LTA) and Non-Performing Loans (NPL) ratios. Key findings indicate that lower interest rates and UMP lead to increased lending but initially raise NPL ratios due to riskier lending, which stabilizes over time as banks adjust their strategies. Robustness tests confirm these effects. This study provides evidence of the risk-taking channel of MP, highlighting the importance of bank-specific factors and suggesting the need for further research on heterogeneous responses among banks.