Bank risk aversion and the risk-taking channel of monetary policy in the euro area

Abstract

Summary: The financial crisis has provoked economic policy interest and academic research on the functioning and empirical verification of the risktaking channel of monetary policy. The results of this paper demonstrate how the European Central Bank’s Bank lending survey responses can be used to construct a “pure” risk aversion indicator of banks’ business lending. Using panel vector autoregression econometric methodology, we find evidence that the monetary policy affects the “pure” risk aversion of banks and later affects business loans and inflation in the euro area. The results suggest that the risktaking channel in the euro area is operational.