Job Market Paper
Navigating Extreme Low-Interest Rates: Bank Risk-taking and
Macroprudential Policies.
This paper delves into the effectiveness of macroprudential policies in curbing banks' risk-taking tendencies during prolonged periods of accommodative monetary policy. It aims to identify the most suitable macroprudential tools for this purpose. Utilizing an unbalanced panel dataset encompassing 1074 commercial banks from 38 countries spanning from 2010 to 2018, the study reveals a discernible deterioration in banks' risk-taking behaviour over the past decade. However, this trend may potentially be mitigated through the application of more stringent measures targeting borrowers, bank capital, and credit management policies.
The findings underscore the effectiveness of borrower-based instruments and measures focused on enhancing banks' credit management policies in countering the impact of prolonged monetary accommodation, especially in extreme scenarios. Considering specific bank characteristics, capital-based and borrower-side instruments exhibit heightened effectiveness for banks with weaker capitalization or limited liquidity. Conversely, instruments targeting banks' credit management policies prove more efficacious for well-capitalized banks with ample liquidity.
Moreover, the research demonstrates that the three categories of macroprudential instruments show heightened effectiveness in less concentrated markets. This article offers valuable insights for policymakers, guiding the appropriate timing and choice of instruments for implementing policy actions effectively under scenarios of monetary accommodation.
