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Bank Risk-Taking and Monetary Policy: Empirical Results for Taiwan

Chung-Wei Kao, Jer-Yuh Wan

Takming University of Science and Technology (Taiwan), Tamkang University (Taiwan)

Will bank risk-taking increase in response to monetary policy easing, especially when interest rates are low, and will banks increase their risk-taking in pursuit of profits? Using Z-score and non-performing loan ratio of Taiwan banking sector covered the period 2015-2020 as proxy variables for bank risk, the empirical analysis shows that there is no significant evidence to support bank risk-taking behavior in a loose monetary policy environment, implying the risk-taking channel of monetary policy not existing. However, after considering the impact of Basel III on bank capital regulations in Taiwan since 2013, bank risk-taking will increase with monetary policy easing as capital regulations become more stringent, which is consistent with the regulatory hypothesis. As for the impact of monetary regime change, banks’ risk will increase with loosening monetary policy during the easing phase of monetary policy, while during monetary policy tightening stage, banks have no risk risking tendency. These inferences are valid after taking the effect of the 2008 financial crisis and considering the cross-effects of bank characteristics and monetary policy, indicating that not only banks’ risk-taking is related to the strengthening of bank capital regulations, but the difference in the regime of monetary easing and tightening also affects bank risk-taking behavior.



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