The trade-off between monetary policy and bank stability

Martien Lamers, Frederik Mergaerts, Elien Meuleman, Rudi Vander Vennet

    Research output: Working paperAcademic

    Abstract

    This paper investigates how monetary policy interventions by the European Central Bank and the Federal Reserve affect the stock market perception of bank systemic risk. In a first step, we identify monetary policy shocks using a structural VAR approach by exploiting the changes of the volatility of these shocks on days on which there are monetary policy announcements. The second step consists of a panel regression analysis, in which we relate monetary policy shocks to market-based measures of bank systemic risk. Our sample includes information on both Euro Area and U.S. listed banks, covering a sample period from October 2008 to December 2015. We condition the impact of the monetary policy shocks on a set of bank-specific variables, thereby allowing for a heterogeneous transmission of monetary policy. We furthermore use the differences between Euro Area core and periphery countries and the additional granularity of U.S. accounting data to assess which channels determine the transmission of monetary policy. Our results indicate that by supporting weaker banks and allowing banks to delay recognizing bad loans, accommodative monetary policy may contribute to the buildup of vulnerabilities in the banking sector and may make an eventual policy tightening more difficult. On the other hand, a continuation of expansionary monetary policy may increase risk-taking incentives by further compressing banks’ net interest margins.
    Original languageEnglish
    Place of PublicationBrussels
    PublisherNational Bank of Belgium
    Publication statusPublished - 1-Sep-2016

    Publication series

    NameWorking Paper
    PublisherNational Bank of Belgium
    Volume308

    Keywords

    • banking
    • monetary policy
    • systemic risk
    • identification-through-heteroskedasticity

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