Banks' Risk And Monetary Policy

Financial innovation and the new ways to transfer credit risk tend to diminish the informational content of standard banks' balance-sheet indicators. The authors show that banks' risk condition as perceived by financial market investors needs to be considered together with the other indicators traditionally used in the bank lending channel literature (size, liquidity and capitalization) to carefully assess a bank's ability and willingness to supply new loans. Using a large sample of European banks, they find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes.