Monetary Policy and Bank Lending Terms: Evidence from US Loans

We present evidence that U.S. banks tend to ease lending terms when monetary policy is more accommodating, consistent with a risk-taking channel of monetary policy.  We use confidential data on individual bank loans to... [ view full abstract ]

We present evidence that U.S. banks tend to ease lending terms when monetary policy is more accommodating, consistent with a risk-taking channel of monetary policy.  We use confidential data on individual bank loans to businesses from 1997 to 2015 from the Federal Reserve’s Survey of Terms of Business Lending.  We find that banks tended to originate loans with lower spreads and that are less likely to be collateralized during periods of low short-term interest rates.  Similarly, we find that, after the substantial expansion of its balance sheet in 2009, increases in Treasury holdings by the Federal Reserve are associated with a decline in loan spreads.  These results suggest that both conventional and unconventional monetary policy in the form of asset purchases are associated with changes in the quality of bank credit.