Monetary Policy and Corporate Risk-Taking
Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Raghuram Rajan, University of Chicago
Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers
AbstractWe analyse the effects of supranational versus national banking supervision on bank credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralization of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism that helps explain the results is higher quantity and quality of resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.
Low Interest Rates and Risk Taking Evidence from United States Credit Registry
AbstractWe investigate the role of low interest rates on firms' risk-taking by using a large
supervisory dataset from FR-Y 14 filings of the U.S. banks. We define risk-taking by
three different measures at the firm-level: default risk, leverage, and earnings' volatility.
We have 3+ million observations on firms' loan obligations together with their other
financial exposures on the balance sheets. Our preliminary results show that small
private firms' earnings volatility has increased at a faster pace than that of public firms
and their leverage has increased over 40 percent since 2014. This was a period where
Federal Funds Rate was between 0 and 1.25 percent. Our preliminary analysis shows
that the channel behind the increase in risk-taking by private firms is the fact that
they borrow at lower borrowing costs and post less collateral relative to the public
firms. We argue that the disproportionate focus in the literature on the volatility and
leverage patterns of the large publicly listed firms, whose data is readily available from
Compustat, will overlook this risk build-up in the corporate sector that is driven by
small private firms.
Institutional Investors, the Dollar, and United States Credit Conditions
AbstractThis paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans - and, hence, suppliers of funding for these loans - are institutional investors, in particular, mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G3 - Corporate Finance and Governance