The Risk-Taking Channel of Monetary Policy: A New Approach and Evidence from Peru

The risk-taking channel of the monetary policy has been extensively studied (see, e.g., Adrian and Song Shin (2010); Borio and Zhu (2012); Jiménez, Ongena, Peydró and Saurina (2014)). Relative to the existing literature, we take a different view on the risk-taking behavior of banks, and rather than focusing on large versus small banks, we focus on how a bank can allocate loans differently across risky markets after a monetary policy shock. First, by using a theoretical model we show that an expansionary monetary policy shock creates the risk-taking channel, by altering a bank's appetite for risk and to rebalance its loans portfolio by issuing more loans in more risky markets relative to lower risky markets. Second, we take our model predictions to the data. We reach identification by using branch-level and province-bank-level data to control for omitted variables. Our branch-level estimation confirms that the sensitivity of lending to MP changes is increasing in the riskiness of borrowers. At higher levels of aggregation, our results hold economical and statistical significance and show robustness that the risk-taking channel of MP has sizable impact on the total lending issued by financial firms.