Does central bank communication affect bank risk-taking?

Abstract

This article examines whether bank risk-taking is influenced by monetary policies as well as by communication policies of a central bank. In particular, we analyse whether the signal emitted by the central bank about a likely rise (fall) in the basic interest rate for the next policy meeting and its pessimistic (optimistic) perception regarding the macroeconomic environment are responsible for inducing banks to take less (more) risks. We provide evidence for the link between monetary policies, central bank communication and bank risk-taking. The findings reveal central bank communication influences the behaviour of banks once their risk perceptions are affected.

Keywords:

• monetary policy
• central bank communication
• bank
• risk-taking

JEL Classification:

• E51
• E52
• E58

Notes

¹ By the end of 2005 the minutes were published monthly, after the beginning of 2006 the minutes are now published every 45 days. In order to adjust the publication of the minutes to the database, from 2006 ahead, regarding the months that there is no publication of the minutes, it is considered that the agents use the latest information available, i.e., the minutes of the previous month. Thus, the value found in the index is repeated for the month that there is no minute. Table A2 (Appendix) shows examples of key words.

² For GMM estimates (Equations 2–4), the instrumental variables are: PROV(–1 to –4), IR(–1 to –2), OGAP(–4 to –9), DEF(–2 to –4) and RREQ(–1 to –4).

³ For GMM estimates (Equation 1), the instrumental variables are: PROV(–1 to –4), IR(–1), OGAP(–4 to –6), DEF(–2 to –4) and RREQ(–1 to –4).

⁴ For GMM estimates (Equation 5), the instrumental variables are: PROV(–1 to –4), IR(–1 to –2), OGAP(–4 to –9), DEF(–2 to –4) and RREQ(–1 to –4).

⁵ Regarding heteroscedasticity and autocorrelation tests, both ARCH and Breusch–Godfrey–LM tests for Equations 1–5 are described in Table A4 (Appendix).