Monetary Policy,Ownership And Bank's Risk-taking Behavior

The impact of monetary policy on the financial crisis has always been the concern of scholars.Especially since the U.S.financial crisis,many economists have rethought the monetary policy in the past.They think the loose monetary policy represented by the long-term low interest rate is one of the important causes of the financial crisis.Therefore,to study the relationship between monetary policy and financial risk will help us better understand the impact of monetary policy and provide new ideas for preventing financial crisis.This paper focuses on the impact of loose monetary policy on the risk-taking behavior of bank.In the past,scholars pointed out that the impact of monetary policy on financial risks isnot only through credit channels,but also risk-taking channels.Thus the loose monetary policy will bring more risk to the financial system than we expected.This article will focus on analyzing this impact mechanism with data from global banks.First of all,we analyze the reason why loose monetary policy lead to more risk-taking behavior of banks:(1)the valuation of income and cash flow mechanism.Loose monetary policy will reduce the bank's risk assessment,which in fact increased the risk commitment;reduce the probability of default,through the financial accelerator effect,increasing the bank's risk-taking.(2)Revenue search mechanism.Due to the stickiness of returns,as interest rates fall,banks have to hold higher-risk assets in order to maintain their past yields.(3)Reaction function of the central bank.When the central bank decision-making is more transparent,it will reduce the uncertainty of the economy,then increase the bank's risk-taking;expecting the rescue of the central bank will have a protective effect,stemming from moral hazard,the bank will take more risks.Secondly,based on the annual data of global commercial banks and 40 economies from 2000 to 2016,distinguishing bank ownership,the empirical study shows that:(1)the decline in interest rates will obviously lead to an increase in risk appetite of commercial banks.(2)Banks with higher capital adequacy ratios will have more substantial risk appetite when the interest rate declines.(3)The impact of monetary policy on bank risk-taking has an asymmetric effect.Looser monetary policies will obviously encourage more banks' risk-taking behaviors;however,tight monetary policy has limited effect on the bank's risk-taking behavior.(4).The state-owned banks have a stronger risk-taking motivation when the interest rate declines.(5)To a certain extent,raising the capital adequacy ratio can restrain the risk-taking behavior of the state-owned banks.Therefore,this paper argues that the traditional monetary policy shows obvious defects,which are not enough to stabilize the macroeconomic and financial systems.When deciding the monetary policy,central banks need to be more cautious,taking into account their impact on participants' risk appetite and the asymmetric effects of such influence.They can enhance supervision when implementing loose monetary policy,so as to ensure that bank risk-taking will not rise excessively,laying a hidden danger to the financial system.This article has three possible contributions:(1)the data includesglobal commercial banks,it is the largest sample in the literature.(2)The paper differentiates the behavior of banks with different ownership,it finds that state-owned bank taking more risk when the interest rate declines.(3)This paper further studies the changes of the bank's risk-taking behavior under different levels of capital adequacy ratio,and points out that the regulation of capital adequacy ratio will be effective to ease the moral hazard behavior of state-owned banks.