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Tese de doutoramento em Economia, Nas últimas décadas, a sofisticação e complexidade dos mercados financeiros tem exposto cada vez mais a fragilidade da economia real a atritos financeiros, o que levanta questões importantes sobre o papel do crédito nos ciclos económico. A textit Grande Recessão é um lembrete gritante de que atritos financeiros podem desempenhar um papel fundamental nas flutuações do ciclo económico, com o acúmulo de desequilíbrios durante tempos tranquilos a conduzir a uma destruição grande e persistente de riqueza quando a bolha estoura, que pode então espalhar-se para a economia real. O objetivo desta tese é explorar a interação entre fricções financeiras e os ciclos económicos, em primeiro lugar abordando a relação entre as restrições aos empréstimos e seu impacto sobre as variáveis macroeconômicas e, em segundo lugar, analisando como as flutuações no risco afetam os ciclos económicos. Para este fim, baseamo-nos em dois modelos encontrados na literatura, que possuem os ingredientes-chave que levaram os autores a argumentar que atritos financeiros podem, em grande escala, ser responsáveis por flutuações nas variáveis macroeconômicas. No Capítulo 1, abordamos o modelo de Jermann and Quadrini (2012), que introduz choques di retamente no sistema financeiro que se propagam para a economia real; foi realizada uma análise das propriedades do modelo nos domínios temporal e da frequência. O uso de ôndulas permitiu uma avaliação de como o modelo se ajusta aos dados em diferentes frequências e em momentos específicos no tempo. Uma característica específica desse modelo é que ele introduz choques dire tamente no sistema financeiro, que se propagam para a economia real. É também um dos primeiros a abordar este canal dentro de uma estrutura de Equilíbrio Geral Estocástico Dinâmico (DSGE). Poucas pesquisas foram realizadas sobre o papel desempenhado pelos mercados financeiros e de crédito durante as recessões dos anos 1970 e início dos anos 1980. No Capítulo 2, seguindo algumas evidências sobre o endurecimento dos padrões de crédito antes ou durante os períodos de recessão, bem como as conclusões de Bernanke et al. (1999) de que fricções financeiras po dem afetar o tamanho das flutuações do ciclo de negócios, estendemos o modelo de Jermann and Quadrini (2012) para introduzir choques no preço do petróleo. O objetivo era analisar a contribuição das fricções financeiras durante este período, onde as recessões foram atribuídas principalmente a grandes aumentos nos preços do petróleo. Os atritos financeiros podem amplificar os ciclos económicos, levando a flutuações macroeconômi cas mais pronunciadas, seja por choques iniciados na economia real ou no próprio sistema financeiro. O papel da política monetária também pode depender da fonte do choque e do canal de transmissão. No Capítulo 3, estabelecemos uma comparação entre as séries temporais empíricas dos prin cipais agregados macroeconômicos durante o primeiro trimestre de 1985 até o último trimestre de 2019, e as séries simuladas a partir das contribuições dos choques incluídos em dois modelos DSGE distintos. O primeiro modelo é a versão neo-keynesianos do modelo de Jermann and Quadrini (2012), que estende Smets e Wouters (2007) com uma restrição de execução que pode ser interpretada como o grau de disposição dos bancos em conceder empréstimos, como uma proxy de padrões de crédito. O segundo modelo é o de Christiano et al. (2014b), que é baseado no mecanismo de acelerador financeiro do modelo de Bernanke et al. (1999), introduzindo choques de risco. Final mente, comparou-se as duas abordagens distintas de modelagem de atritos financeiros, recorrendo às diferentes fontes e origens de choques. Para a comparação, foram empregues as ferramentas decorrentes das ôndulas para analisar o quanto os atritos financeiros podem explicar das flutuações observadas em diferentes frequências., Over the last decades, the sophistication and complexity of financial markets has increasingly exposed the fragility of the real economy to financial frictions, which raises important issues regarding the role of credit in business cycles. The Great Recession is a stark reminder that financial frictions can play a key role in business cycle fluctuations, with the buildup of imbalances during tranquil times leading to the large and persistent destruction of wealth when the bubble bursts, which may then spill over to the real economy. The purpose of this thesis is to explore the interaction between financial frictions and business cy cles, firstly by addressing the relationship between borrowing constraints and their impact on macroe conomic variables and, secondly, by analyzing how fluctuations in risk affect business cycles. To this end, we relied on two models found in literature, which possess the key ingredients that have led the authors to argue that financial frictions may, on a large scale, be responsible for fluctuations in macroeconomic variables. In Chapter 1, one began with the Jermann and Quadrini (2012) model, which introduces shocks directly in the financial system that propagate to the real economy; an analysis was undertaken of the model properties in the time-frequency domains. The use of wavelet tools allowed for an evaluation of how the model fits the data at different frequencies, and at specific moments in time. A specific feature of this model is that it introduces shocks directly in the financial system, which then spill over to the real economy. It is also one of the first to address this channel within a Dynamic Stochastic General Equilibrium (DSGE) framework. Little research has been conducted on the role played by financial and credit markets during the 1970s and early 1980s recessions. In Chapter 2, following some evidence on the tightening of credit standards before or during the recession periods, as well as the findings by Bernanke et al. (1999) that financial frictions can affect the size of business cycle fluctuations, we extended the Jermann and Quadrini (2012) model to introduce oil price shocks. The aim was to analyze the contribution of financial frictions during this period, where the recessions were mainly attributed to large increases in oil prices. Financial frictions can amplify business cycles, leading to more pronounced macroeconomic fluc tuations, either due to shocks starting in the real economy or in the financial system itself. The role of monetary policy may also be dependent on the source of the shock and the transmission channel. In Chapter 3 we established a comparison between the empirical time series of major macroeco nomic aggregates during the first quarter of 1985 to the last quarter of 2019, with simulated series computed from the contributions of the shocks included in two distinct DSGE models. The first model is the Jermann and Quadrini (2012) New Keynesian version of the model, which extends the Smets and Wouters (2007) with an enforcement constraint that may be interpreted as the degree of willing ness of banks to lend, as a proxy of credit standards. The second model is the Christiano et al. (2014b) model, which is based on the Bernanke et al. (1999) financial accelerator mechanism, thus introduc ing risk shocks. Finally, one compared two distinct approaches of modelling financial frictions, using different sources and origins of shocks. For the comparison, wavelet tools were employed to analyze how deeply financial frictions can explain the observed fluctuations at different frequencies., This work has been supported by the Doctoral scholarship SFRH/BD/96380/2013 funded by FCT, the Portuguese Ministry of Science, Technology and Higher Education, through national funds, and co-financed by the European Social Fund (ESF) through the Operational Programme for Human Capital (POCH).

We examine whether conventional monetary policy has an impact on bank credit standards (CS) through the manipulation of interest rates. Using three distinct methodologies, to provide more insights and perspectives to this relationship, the results confirm that the policy rate appears to have a positive relationship with CS, that is an increase in interest rates would, ceteris paribus, lead to a tightening of CS. However, this effect is not found to be large and, most importantly, it is likely to be outweighed by the presence of counteracting factors, the most notable of which is private consumption. Other macroeconomic factors such as inflation, investment, and housing prices also have an impact on bank CS, the size of which varies across specifications. The empirical results suggest that while the interest rate can cool off banking behaviour, ceteris paribus, that is if no change in the economy takes place, this is not likely a realistic scenario. (JEL codes: E51, E52, E58, and G21)

Due to the significant share of mortgage loans in the portfolio structure of a large number of commercial banks, monitoring the ability of the household sector to repay debts is very important for financial stability. Since the accumulation of non-performing loans in banks' balance sheets is significantly affected by the fall in real estate prices, the paper will explain the factors that affect the cycles in the real estate market.The purpose of this paper is to show research that deals with the causes of non-performance of mortgage loans and the impact of lending standards on reducing systemic risk. In a period of crisis caused by various government measures to combat the COVID-19 pandemic, adequate lending standards are becoming even more important. Special attention in the paper is paid to the influence of LTV raids, the interest rate at which the loan was approved and the maturity of the loan on the probability of occurrence of default status. The paper provides a basis for further research that would include the extent to which the application of certain lending standards has contributed to the reduction of payment delays in the specific business conditions caused by the current pandemic.

We study how debt market frictions that constrain the ability of firms to buffer a tightening in bank credit supply affect corporate yield spreads. We focus on the frictions driven by the regional availability of debt financing. We provide evidence of a strong regional segmentation in the debt market, and build a measure of debt inflexibility that captures the inability to replace bank loans with corporate bonds. We document that more inflexible firms suffer a bigger increase in yield spreads as bank credit tightens. The impact is stronger among smaller firms, lower rated firms, and firms relying more on bank debt. Further, more inflexible firms display a stronger link between yield spreads and cash flow volatility, a stronger link between yield spreads and stock volatility (Campbell and Taksler, 2003) as well as a closer connection between changes in yield spreads and stock returns.

In newly collected data on 46 economies over 1990-2011, we show that financial development since 1990 was mostly due to growth in credit to real estate and other asset markets, which has a negative growth coefficient. We also distinguish between growth effects of stocks and flows of credit. We find positive growth effects for credit flows to nonfinancial business but not for mortgage and other asset market credit flows. By accounting for the composition of credit stocks and for the effect of credit flows, we explain the insignificant or negative growth effects of financial development in recent times. What was true in the 1960s, 1970s, and 1980s when the field of empirical credit-growth studies blossomed, is no longer true in the 1990s and 2000s. New bank lending is not primarily to nonfinancial business and financial development may no longer be good for growth. These trends predate the 2008 crisis. They prompt a rethink of the role of banks in the process of economic growth. (JEL E44, O16, O40, C33)

While some credit booms are followed by economic underperformance, many are not. Can lending standards help separate good credit booms from bad credit booms contemporaneously? To observe lending standards internationally, I use information from primary debt capital markets. I construct the high-yield (HY) share of bond issuance for a panel of 38 countries. The HY share is procyclical, suggesting that lending standards in bond markets are extrapolative. Credit booms with deteriorating lending standards (rising HY share) are followed by lower GDP growth in the subsequent three to four years. Such booms deserve attention from policy makers.

This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers' default risk. Firms denied credit cut employment and labor reallocates mostly towards safer producers. Lending standards propagate bank capital shortfalls through labor misallocation causing deeper and more persistent real effects. The paper also shows that lending spreads are insufficient indicators of credit supply disruptions. That is, for the same increase in credit spreads, output falls faster when denial rates are increasing. Finally, with endogenous lending standards, first-moment bank capital shocks look like second-moment shocks.

In newly collected data on 46 economies over 1990-2011, we show that financial development since 1990 was mostly due to growth in credit to real estate and other asset markets, which has a negative growth coefficient. We also distinguish between growth effects of stocks and flows of credit. We find positive growth effects for credit flows to nonfinancial business but not for mortgage and other asset market credit flows. By accounting for the composition of credit stocks and for the effect of credit flows, we explain the insignificant or negative growth effects of financial development in recent times. What was true in the 1960s, 1970s, and 1980s when the field of empirical credit-growth studies blossomed, is no longer true in the 1990s and 2000s. New bank lending is not primarily to nonfinancial business and financial development may no longer be good for growth. These trends predate the 2008 crisis. They prompt a rethink of the role of banks in the process of economic growth. (JEL E44, O16, O40, C33)

This paper examines the impact of monetary conditions on the risk-taking behaviour of banks in the Czech Republic by analysing the comprehensive credit register of the Czech National Bank. Our duration analysis indicates that expansionary monetary conditions promote risk-taking among banks. At the same time, a lower interest rate during the life of a loan reduces its riskiness. While seeking to assess the association between banks’ appetite for risk and the short-term interest rate we answer a set of questions related to the difference between higher liquidity versus credit risk and the effect of the policy rate conditioned on bank and borrower characteristics. This work was supported by the Czech national Bank (Research Project No. C4/2009) and the Grant Agency of the Czech Republic projects GA CR No. 14-02108S and No. P402/12/G097).

Credit risk – the risk that borrowers will not repay their loans – is one of the main risks that financial intermediaries face, and has been the underlying driver of most systemic banking crises in advanced economies over recent decades. This paper explores the ex post credit risk experience – the 'credit loss' experience – of the Australian banking system. It does so using a newly compiled dataset covering bank-level credit losses over 1980 to 2013. The Australian credit loss experience is dominated by two episodes: the very large losses around the early 1990s recession and the losses during and after the global financial crisis. The available data indicate the above-average losses during both periods were on lending to businesses. Credit losses on housing loans during and after the global financial crisis were minimal in Australia. Consistent with this, an econometric panel-data model that properly accounts for portfolio composition indicates that conditions in the business sector, rather than those in the household sector, drove credit losses in Australia during the period studied. The data also indicate that the very worst credit loss outcomes – including those that led to the failure of several state government-owned banks in the early 1990s – were driven by poor lending standards.

We use a simple quantitative asset pricing model to "reverse-engineer" the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage contract (one-period versus long-term). We find that the model with moving average forecast rules and long-term mortgage debt does best in plausibly matching the patterns observed in the data. Counterfactual simulations show that shifting lending standards (as measured by a loan-to-equity limit) were an important driver of the episode while movements in the mortgage interest rate were not. All models deliver rapid consumption growth during the boom, negative consumption growth during the Great Recession, and sluggish consumption growth during the recovery when households are deleveraging.

We use bank-level information on lending practices from the euro area Bank Lending Survey to construct a new indicator of loans’ supply tightening controlling for both macroeconomic and bank-specific factors. Embedding this information as external instrument in a Bayesian vector autoregressive model (BVAR), we find that tighter bank loan supply to non-financial corporations leads to a protracted contraction in credit volumes and higher bank lending spreads. This fosters firms’ incentives to substitute bank loans with market finance, producing a significant increase in debt securities issuance and higher bond spreads. We also show that loans’ tightening shocks explain a large fraction of the contraction in real activity and the widening of credit spreads especially over the recession which followed the euro area sovereign debt crisis.

We analyze how firms’ segmentation into credit classes affects the lending standards applied by banks to small and medium enterprises over the cycle. We exploit an institutional feature of the Italian credit market that generates a discontinuity in the allocation of comparable firms into the performing and substandard classes of credit risk. In the boom period, segmentation results in a positive interest rate spread between substandard and performing firms. In the bust period, the increase in banks’ cost of wholesale funds implies that substandard firms are excluded from credit. These firms then report lower values of production and capital investments. Received January 22, 2016; editorial decision December 18, 2017 by Editor Robin Greenwood. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

We use a simple quantitative asset pricing model to “reverse-engineer” the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage contract (one-period versus long-term). We find that the model with moving average forecast rules and long-term mortgage debt does best in plausibly matching the patterns observed in the data. Counterfactual simulations show that shifting lending standards (as measured by a loan-to-equity limit) were an important driver of the episode while movements in the mortgage interest rate were not. Our results lend support to the view that the U.S. housing boom was a classic credit-fueled bubble involving over-optimistic projections about future housing values, relaxed lending standards, and ineffective mortgage regulation.

It is widely perceived that the supply of mortgages, especially since the extensive liberalization of the mortgage market since the 1980s, has had implications for the Dutch housing market. In this paper we introduce a new method to estimate a credit condition index (CCI). The credit conditions index represents changes in the supply of credit over time, apart from changes in interest rates and income. Examples of these changes include (1) the development of markets for financial futures, options, swaps, securitized loans and synthetic securities which allowed for easy access to credit for financial intermediaries, (2) more sophisticated risk management, for example improved initial credit scoring, (3) changes in risk-perception by financial intermediaries due to changes in the macro-economic environment, like rate of unemployment, (4) introduction of new mortgage products, (5) reduced transaction costs and asymmetric information with innovations of IT, telephony and data management and (6) financial liberation. Financial liberation is the relaxation or tightening of credit controls like liquidity ratios on banks, down-payment requirements, maximum repayment periods, allowed types of mortgages, loan-to-value and loan-to-income ratios, etc. The credit conditions index is estimated as an unobserved component in an error-correction model in which the average amount of mortgage is explained by the borrowing capacity and additional control variables. The model is estimated on data representing first time buyers. For first time buyers we can assume that the housing and non-housing wealth is essentially zero. The credit condition index is subsequently used in an error-correction model for house prices representing not only first time buyers, but all households. The models are estimated using quarterly data from 1995 to 2012. The estimated credit condition index has a high correlation with the Bank Lending Survey, a quarterly survey in which banks are asked whether there is a tightening or relaxation of (mortgage) lending standards compared to the preceding period. The credit condition index has explanatory power in the error-correction model for housing prices. In real terms house prices declined about 25% from 2009 to 2012. The estimation results show that 12% point of this decline can be attributed to a decline in the credit conditions index.

This thesis consists of three essays. In the first essay, we analyze bank insiders' trading in the securities of their own bank in the run-up to the 2007-08 financial crisis. We show that on average ex-ante bank insiders' net sell of shares implies worse performance in the crisis. Our result points out that the bankers, at least to some extent, were aware of the risks they were taking. In the second essay, I analyze the bank insiders' trading in their own portfolio during the crisis and find that insiders trade in a contrarian manner. In the third essay, we analyze the cycle in lending conditions and standards using a unique dataset on mortgage loans in Spain and find that lending standards are softer in the boom than in the bust. Also, we analyze the mechanism by which banks could increase the supply of mortgage loans despite of regulatory restrictions. Our evidence is consistent with banks encouraging appraisers to introduce an upward bias in appraisal prices, to meet LTV regulatory thresholds., La tesis tiene contiene tres ensayos: En el primer ensayo, analizo el uso de información privilegiada a la hora de comerciar con los valores de su propio banco en el período previo a la crisis financiera de 2007-08. Se muestra que, en promedio, la venta neta de acciones ex ante por parte de los 'insiders' de los bancos implica un peor rendimiento durante la crisis. El resultado indica que los banqueros, por lo menos en cierta medida, eran conscientes de los riesgos que estaban tomando en el boom. En el segundo ensayo, analizo las operaciones bancarias de los 'insiders' en su cartera de activos durante la reciente crisis y se encuentra que los 'insiders' comercian de una manera contraria, lo que sugiere que en las acciones bancarias bajaron por debajo de sus fundamentales. En el tercer ensayo, analizo el ciclo en las condiciones y estándares de préstamos usando una base de datos única de los préstamos hipotecarios en España y encuentro que las condiciones de crédito son más relajadas en el auge que en la recesión. Asimismo, analizo el mecanismo por el cual los bancos podían aumentar la oferta de créditos hipotecarios a pesar de las restricciones regulatorias. La evidencia es consistente con la hipótesis de que los bancos alentaron a los tasadores a introducir un sesgo al alza en los precios de tasación, para cumplir con los umbrales reglamentarios de 'LTV', y así poder dar más préstamos.

Levels of interest rates below historical norms may have enhanced financial instability in both developed and in developing economies during the 2000´s. The risk-taking channel of monetary transmission policy is a recent theory that explains the interaction between risk perceptions of the financial system and monetary policy. This paper presents empirical evidence of the risk-taking channel of monetary policy using detailed information on consumer and commercial loans from the Colombian banking system. Using probit and duration models, we find that the banking system takes on more risk when the level of interest rates are too low. We also find that the response to interest rates is higher in the case of commercial loans. Niveles de tasas de interés por debajo de sus niveles históricos pueden haber contribuido a una mayor inestabilidad en economías tanto desarrolladas como en desarrollo durante la década del 2000. El canal de toma de riesgo de la transmisión de la política monetaria es una teoría reciente que explica la relación entre las percepciones de riesgo del sistema financiero y la política monetaria. En este artículo se presenta evidencia empírica de la evidencia del canal de toma de riesgo utilizando información detallada de créditos comerciales y de consumo del sistema bancario en Colombia. Mediante el uso de modelos probit y de duración encontramos que el sistema bancario toma riesgo cuando las tasas de interés se encuentran demasiado bajas. También encontramos que la respuesta a las tasas de interés es más alta en el caso de los créditos comerciales. Níveis de taxas de juros abaixo de seus níveis históricos podem ter contribuído com uma maior instabilidade em economias tanto desenvolvidas como em desenvolvimento durante a década de 2000. O canal de tomada de risco da transmissão da política monetária é uma teoria recente que explica a relação entre as percepções de risco do sistema financeiro e da política monetária. Neste artigo se apresenta evidência empírica da evidência do canal de tomada de risco utilizando informação detalhada de créditos comerciais e de consumo do sistema bancário na Colômbia. Mediante o uso de modelos probit e de duração, consta que o sistema bancário toma risco quando as taxas de juros se encontram demasiadamente baixas. Também consta que a resposta às taxas de juros é mais alta no caso dos créditos comerciais.

This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. We analyze business lending by 155 banks to 9613 firms in 1976 different localities across 16 countries. We find that lower barriers to entry, tighter restrictions on bank activities, and higher minimum capital requirements in domestic markets are associated with lower bank lending standards abroad. The effects are stronger when banks are less efficiently supervised at home, and are observed to exist independently from the impact of host-country regulation.

The recent financial crisis has brought to the forefront the need for a better understanding of the transmission mechanisms of monetary policy. The main step forward on this issue has drawn on work aimed at stressing the role of the financial sector in this transmission. Particular emphasis has been placed on how policy actions impact risk perceptions and attitudes of banks and other financial institutions, leading to shifts in the supply of credit. Along these lines, and based on evidence from Colombia, this paper finds a significant link between low interest rates and banks’ risk-taking based on evidence from Colombia. Lower interest rates raise the probability of default on new loans, but reduce that on outstanding loans. Furthermore, this channel of policy transmission depends on some bank, loan and borrower characteristics, as well as on macroeconomic conditions, such as the growth rate of the economy. La crisis financiera reciente ha advertido la necesidad de un mejor entendimiento del mecanismo de transmisión de la política monetaria. El principal avance en esta dirección destaca la participación del sistema financiero en esta transmisión. En particular, se ha enfatizado en la manera como las acciones de política tienen efecto sobre las percepciones de riesgo y actitudes de los bancos y otras instituciones financieras, las cuales implican un cambio en la oferta de crédito. Con este marco analítico y con base en la evidencia para Colombia, este documento encuentra una relación significativa entre bajos niveles de tasas de interés y toma de riesgo por parte de los bancos. Tasas de interés bajas aumentan la probabilidad de suspender los pagos de los créditos nuevos y reducen la de los créditos vigentes. Más aún, este canal de transmisión depende de las características de los bancos, de los créditos y de los deudores, así como de las condiciones macroeconómicas. A recente crise financeira tem chamado a atenção sobre a necessidade de uma melhor compreensão do mecanismo de transmissão da política monetária. O principal avanço neste sentido salienta a participação do sistema financeiro nesta transmissão. Em particular, faz-se ênfase na maneira como as ações da política têm efeito nas percepções de risco e as atitudes dos bancos e outras instituições financeiras, as quais supõem uma mudança na oferta de crédito. Com este marco analítico e com base na evidência da Colômbia, este documento encontra uma relação significativa entre baixas taxas de juros e toma de risco por parte dos bancos. As baixas taxas de juros incrementam a probabilidade de suspender os pagamentos dos créditos novos e reduzem a dos créditos vigentes. Ainda mais, este canal de transmissão depende das características dos bancos, dos créditos e dos endividados, assim como das condições macroeconômicas.

How do credit standards on the mortgage market affect neighbourhood choice and the resulting level of urban segregation? To answer this question, we first develop a model of neighbourhood choice with credit constraints. The model shows that a relaxation of credit standards can either increase or decrease segregation, depending on racial income gaps and on races' preferences for neighbourhoods. We then estimate the effect of the relaxation of credit standards that accompanied the 1995-2006 mortgage credit boom on the level of school segregation. Census tract racial composition is strongly correlated with the racial composition of the 10 closest schools in the cross section. Matching a national data set of mortgage originations with annual racial demographics of each of the public schools in the United States from 1995 to 2006, we find that the relaxation of credit standards has caused an increase in the segregation of blacks through a lower exposure of blacks to Hispanics and whites.

The long-running debate about the role of monetary policy in responding to rising asset prices has received renewed attention in the wake of the global financial crisis. This paper contributes to this debate by describing the Australian experience of a cycle in house prices and credit from 2002 to 2004, and discussing the role played by various policies during this episode. In particular, it focuses on the efforts by the Reserve Bank of Australia to draw attention to the risks associated with large, ongoing increases in housing prices and household borrowing.

Using a unique dataset of the Euro area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards, for household and corporate loans. This softening – especially for mortgages – is amplified by securitization activity, weak supervision for bank capital and too low for too long monetary policy rates. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor-rule residuals experienced a worse economic performance afterwards. These results help shed light on the origins of the crisis and have important policy implications.

We analyse the impact of monetary policy on bank risk-taking and pricing. Bolivia provides us with an excellent experimental setting to identify this impact. Its small economy is not synchronized with the US economy but its banking system is almost fully dollarized. Consequently the US federal funds rate is the appropriate measure of monetary policy. We study the impact of the federal funds rate on the riskiness and pricing of new bank loans granted in Bolivia between 1999 and 2003, a period of significant variation in the federal funds rate. We find robust evidence that a decrease in the US federal funds rate prior to loan origination raises the monthly probability of default on individual bank loans. We also find that initiating loans with a subprime credit rating or loans to riskier borrowers with current or past non-performance become more likely when the federal funds rate is low. However, loan spreads do not increase, seemingly even decrease, in changes in the probability of default. Hence banks do not seem to price the additional risk taken. Furthermore, banks with more liquid assets and less funds from foreign financial institutions take more risk when the federal funds rate is low, and reduce loan spreads more despite the additional risk they seemingly take.