Risk-Taking Channel and Its Non-Linearities: The Case of an Emerging Market Economy

We test whether the risk-taking channel of monetary policy transmission mechanism is active in Poland, an emerging market economy. Based on confidential bank-level data we construct novel measures of risk taken by banks, and exploit asymmetries in bank lending with respect to the level of the interest rate and across bank types in order to identify the the risk-taking channel. Our results provide some evidence of the risk-taking behavior of Polish banks. However, only in the segment of large loans to non financial corporations we are able to conclude that increased risk of new loans after lowering short-term interest rates represents supply-side phenomenon. We show that the loosening of monetary policy has different effects depending on the initial level of interest rates and this effect is different across banks, depending on their size, liquidity and funding structure. Our results contribute to the ongoing discussion on consequences of conducting monetary policy in the low interest rate environment as currently observed in many advanced and emerging economies.