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Monetary Policy, Bank Lending, and the Risk-Pricing Channel

Authors

  • RUBY P. KISHAN,

    1. Ruby P. Kishanis in the Department of Finance and Economics, Texas State University, San Marcos, TX. Timothy P. Opiela is at Kellstadt Graduate School of Business and the Department of Economics, DePaul University, Chicago, IL (E-mail: topiela@depaul.edu).
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  • TIMOTHY P. OPIELA

    1. Ruby P. Kishanis in the Department of Finance and Economics, Texas State University, San Marcos, TX. Timothy P. Opiela is at Kellstadt Graduate School of Business and the Department of Economics, DePaul University, Chicago, IL (E-mail: topiela@depaul.edu).
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  • The idea of a monetary channel through market discipline/risk-pricing appears in earlier versions of this paper presented at: the Bank of Thailand Research Department in Bangkok, Thailand in December 2007; the WEAI Conference in Hawaii in June 2008; the SEA Conference in San Antonio, TX, November 2009; and the WEAI Conference in Portland, OR, June 2010. We thank Elijah Brewer, Bob Hetzel, Dmytro Holod, Ryan Lampe, and especially Ewa Nikiel for discussions and comments that greatly improved this paper, and Christopher Crowe for providing the Romer–Romer policy data. We also thank the two anonymous referees and the editor, Bob DeYoung, for comments that helped to sharpen our arguments and encouraged us to explore the effect of the risk-pricing channel on the growth of jumbo CDs and total loans.

Abstract

This paper identifies a monetary policy channel through the risk pricing of bank debt in the market for jumbo certificates of deposit (jumbo CDs). Adverse policy shocks increase debt holder perceptions of bank default, increasing the risk premia for some banks, thereby decreasing their external funding of loans. The results show that contractionary policy increases the sensitivity of jumbo-CD spreads to leverage and asset risk for small banks, and to leverage for large banks. The results also show a distributional and aggregate effect on banking system jumbo CDs and total loans, producing a risk-pricing (or market discipline) channel. This channel has implications for monetary and regulatory policies, and financial stability.

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