Does monetary policy affect bank risk?

Abstract

We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence suggesting that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity, and bank competition. The results suggest that monetary policy is not neutral from a financial stability perspective.