Working Paper: CEPR ID: DP6514
Authors: Gabriel Jiménez; Steven Ongena; Jos Luis Peydr Alcalde; Jess Saurina
Abstract: We investigate the impact of the stance and path of monetary policy on the level of credit risk of individual bank loans and on lending standards. We employ the Credit Register of the Bank of Spain that contains detailed monthly information on virtually all loans granted by all credit institutions operating in Spain during the last twenty-two years ? generating almost twenty-three million bank loan records in total. Spanish monetary conditions were exogenously determined during the entire sample period.Using a variety of duration models we find that lower short-term interest rates prior to loan origination result in banks granting more risky new loans. Banks also soften their lending standards ? they lend more to borrowers with a bad credit history and with high uncertainty. Lower interest rates, by contrast, reduce the credit risk of outstanding loans. Loan credit risk is maximized when both interest rates are very low prior to loan origination and interest rates are very high over the life of the loan. Our results suggest that low interest rates increase bank risk-taking, reduce credit risk in banks in the very short run but worsen it in the medium run.Risk-taking is not equal for all type of banks: Small banks, banks with fewer lending opportunities, banks with less sophisticated depositors, and savings or cooperative banks take on more extra risk than other banks when interest rates are lower. Higher GDP growth reduces credit risk on both new and outstanding loans, in stark contrast to the differential effects of monetary policy.
Keywords: bank organization; business cycle; credit risk; duration analysis; financial stability; lending standards; low interest rates; monetary policy; risktaking
JEL Codes: E44; G21; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower short-term interest rates (E43) | higher credit risk (G21) |
| lower short-term interest rates (E43) | banks soften lending standards (G21) |
| lower short-term interest rates (E43) | increase in hazard rate of loan default (G21) |
| lower interest rates (E43) | reduce credit risk of outstanding loans (G21) |
| lower interest rates (E43) | exacerbate credit risk in medium term (F65) |
| higher GDP growth (O49) | reduced credit risk on new and outstanding loans (G21) |
| lower interest rates (E43) | increased bank risktaking (G21) |
| low interest rates lead to increased bank risktaking (G21) | mitigate credit risk in short run (G21) |
| low interest rates lead to increased bank risktaking (G21) | worsen credit risk in longer term (F65) |