Author: Bruno De Menna
Publisher:
Published: 2020
Total Pages: 0
ISBN-13:
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The thesis contributes to recurrent debates in the macroeconomics of banking regarding the risk-taking channel of monetary policy. As the unifying theme of the present essays, I tackle this issue from three different angles with a special focus on the euro area. I rely on available data and different identification strategies to deliver up-to-date empirical evidence contributing to a deeper understanding of the monetary policy impacts on credit risk. In the first chapter of the thesis, I investigate how the risk-taking channel of monetary policy interacts with the degree of leverage in banks' balance sheets after the Global Financial Crisis of 2008 (GFC). Using dynamic panel techniques, I first find significant statistical evidence that credit risk is negatively associated with variations in interest rates, while competition in national banking industries tends to enhance this effect. I also suggest that this negative relationship is most pronounced for banks with relatively high levels of leverage, which is consistent with a ''search for yield'' effect. These results for the euro area are strikingly different from the U.S. banking industry, confirming that time, geographical circumstances, and local banking market conditions are key in understanding the impact of monetary policy on credit risk. The second chapter investigates the joint impact of bank capital and funding liquidity on the monetary policy's risk-taking channel. Using data on the euro area from 1999 to 2018 and triple interactions between monetary policy, bank equity, and funding liquidity, I shed light on a ''crowding-out of deposits'' effect prior to the GFC, which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, the analysis also highlights a missing crowding-out of deposits effect among low-efficiency banks in the aftermath of the GFC. Consequently, a trade-off arises between financial stability and increased funding liquidity, requiring a special treatment for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area as by the Basel III framework suggests. The third and last chapter extends the analysis to the special case of cooperative banks and relationship lending in the euro area. These financial intermediaries tell a different story between countries and therefore imply different responses to a common monetary policy. Accordingly, I find no evidence of the presence of a risk-taking channel of monetary policy for consolidated (i.e., less committed to relationship lending) cooperative banks, whereas the results indicate extensive evidence of a risk-taking channel in the euro area for non-cooperative banks (see also the previous chapters of the thesis). Therefore, consolidated cooperative banks seem not to raise their credit risk significantly when monetary policy is eased. Further, I highlight that the profitability of cooperative banks preserving their relationship lending model is more severely hit by a low interest rate environment compared to cooperative banks opting for consolidation. This finding raises issues on the mid-term durability of relationship lending as interest rates have been low for an extended period in the European banking industry. I ultimately find that both non-cooperative banks and relationship-based cooperative banks are concerned about the risk-taking channel of monetary policy transmission, which results in an increase in their credit risk under accommodating monetary conditions. Nevertheless, I suggest that such similarities do not exist for the same reasons, as relationship lending is associated with a fundamentally different lending process than transactions-based lending technologies, which devote significantly lower proportions of their assets to lending to small businesses.
