Monetary policyhas efficiency when changes in the policy rate are transferred to the bank’srate of lend, which in turns affects to the aggregate of domestic demand, andinvestment, ultimately to the whole output. (Xu & Chen, 2012).Thetransmission mechanisms of monetary policy so-called “risk-takingchannels” might operate in a several ways.It may impactthrough the influence of interest rates to the cash flows, input and value ofprofitability of the bank.
For example low-interest rate increase assets andprofitability as well as income, which in turns could increase risk toleranceand /or decrease risk sensation. The behavior of default probabilitiesevaluation, loss default, correlations, and volatilities are representing theconcentration to the influence of riskiness. The common point that risktolerance increases/decreases with wealth by influencing on risk probability.
While the bank risk-taking channels assume its flexibility attitudes againstmonetary policy directions (Altunbas et al.2010; Gaggl and Valderrama2010). And when expansionary monetarypolicy prolonged its period, it has an influence on the sensitivity, behavior,and principles of banks risk-taking decisions.In this case,banks increase the volumes of lending through traditional mechanisms anddeclining the quality of portfolios (Angeloni et al.
2013), where the interestrate influences not only to the quality but also to the quantity of bankcredit. Thereby it is argued thatmonetary policy might promote the financial imbalances.Because of theimportance of banks in the monetary policy transmission the bank risk-takingchannels especially credit channel is the main provider of monetary policyrisk-taking channels. In credit channel, a low-interest rate increases assetsvalue, as well as the attention of the borrowers and, improves repaymentconditions. Such circumstances increase the banks’ willingness to supply moreloans.
Moreover, when central banks as the main driver of monetary policyprovide more money to the commercial branches with low refinancing rate, bankshave an ability to respond to the borrowers by lending them more loans, whichincreases the banks’ risk.