Monetary policy, risk-taking channel and income structure: an empirical assessment of the French banking system

According to some recent empirical papers, periods of low interest rates would favor a risk-taking channel of monetary policy whereby bank risk-appetite and risk-taking behavior would be stronger after. Several theoretical explanations exist to this phenomenon, such as the managerial compensation schemes linked to fixed objectives, the procyclical valuation methods of assets, income and cash flows, or the abundant liquidity at a low cost. This paper studies the risk behavior of the main French banks during a recent period of low interest rates (1998-2008) and concludes to the existence of a risk-taking channel. In addition, our analysis suggests that liquid banks are more prone to risk-taking. We also highlight a higher risk transmission for banks relying more on fees and commission income.