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The Risk Channel in the Transmission Mechanism Of Monetary Policy in the European Monetary Union Based on German Data

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Pankow, Susann (2024) The Risk Channel in the Transmission Mechanism Of Monetary Policy in the European Monetary Union Based on German Data. PhD thesis, University of Gloucestershire. doi:10.46289/7T9RKU3A

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Abstract

This research answers the call of de Groot (2014) to explore the risk channel in the transmission of monetary policy by identifying the operating mechanism. The importance of that topic arises because central bankers are increasingly confronted with fluctuations in the business cycle that result from an unnoticed pile up of risk in the balance sheet of commercial banks. Decision makers of monetary policy need to understand this kind of risk-related business cycle fluctuations in order to respond appropriately with their monetary policy measures. This Post-Positivist research contributes theoretical and empirical insights on the underlying mechanism of the risk channel in the European Monetary Union. The theoretical findings consist in a theoretical representation of the risk channel, which explains the effect of monetary policy on risk perception and risk-taking of commercial banks. The strength of the mechanism depends on the liquidity multiplier as well as macroeconomic and financial background conditions. Macroprudential bank regulation affects the risk channel through the capital framework effect and the capital threshold effect. The empirical findings are based on a regression analysis on regulatory data of German commercial banks in the period between 2002 and 2019. The empirical evidence supports the hypotheses on the risk channel mechanism: First, low ECB interest rates on main refinancing operations have a statistically significant, positive effect on credit risk perception of German IRBA banks. Second, low ECB interest rates on main refinancing operations have a statistically significant, negative effect on credit risk-taking of German banks. Third, the ECB interest rate on main refinancing operations has a statistically significant, negative effect on interest rate risktaking of German banks. Fourth, the evidence points to a nonlinear nature of the risk channel in monetary transmission. The implication for monetary policy makers is that monetary policy measures aimed to stabilise inflation can under certain circumstances have undesired side effects on the accumulation of risk in the balance sheet of commercial banks and hence the stability of the bank sector.

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Thesis (PhD)

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