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BOK Working Paper No.2019-7, Monetary Policy's Risk-Taking Channel in Consideration of Bank's Profit and Asset Structure: Evidence from Korea

Economic Research Institute (82-2-759-5485) 2019.02.10 3133

Title : Monetary Policy's Risk-Taking Channel in Consideration of Bank's Profit and Asset Structure: Evidence from Korea

Author : Uijin Kim(BOK), Hosung Jung(BOK)


<Abstract>


This paper explores the effect of an interest rate change on the risk-taking of a bank in consideration of its profit and asset structure. The risk-taking is proxied by the risk weight of a bank, derived from its BIS capital ratio. We show that in Korea, an interest rate increase (decrease) make a bank bear less (more) risk. The risk-taking of a bank more profitable is less sensitive to an interest rate change. In addition, the asset structure, such as ratio of loan to total asset and ratio of short-term asset to total asset, of a bank adopting internal ratings based approach for its asset risk assessment, has more impact on bank’s risk-taking than one with standardized approach. This paper is the first attempt to use the risk weight of a bank under capital regulation to analyze the relation between an interest rate change and bank’s risk-taking. It thus contributes to the literature by the use of direct measure for risk-taking of a bank and by showing the interaction between monetary policy and macroprudential policy.

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