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ECB monetary policy and the term structure of bank default risk

Tom Beernaert (UGent) , Nicolas Soenen (UGent) and Rudi Vander Vennet (UGent)
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Abstract
Euro Area banks have been confronted with unprecedented monetary policy actions by the ECB. Monetary policy may affect bank risk profiles, but the consequences may differ for short-term risk versus long-term or structural bank risk. We empirically investigated the association between the ECB’s monetary policy stance and market-perceived short-term and long-term bank risk, using the term structure of default risk captured by bank CDS spreads. The results demonstrated that, during the period 2009–2020, ECB expansionary monetary policy diminished bank default risk in the short term. However, we did not observe a similar decline in long-term bank default risk, since we documented that monetary stimulus is associated with a steepening of the bank default risk curve. The reduction of bank default risk was most pronounced during the sovereign debt crisis and for periphery Euro Area banks. From 2018 onwards, monetary policy accommodation is associated with increased bank default risk, both short-term and structurally, which is consistent with the risk-taking hypothesis under which banks engage in excessive risk-taking behavior in their loan and securities portfolios to compensate profitability pressure caused by persistently low rates. The increase in perceived default risk is especially visible for banks with a high reliance on deposit funding.
Keywords
Finance, Economics and Econometrics, Accounting, Business, Management and Accounting (miscellaneous)

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MLA
Beernaert, Tom, et al. “ECB Monetary Policy and the Term Structure of Bank Default Risk.” JOURNAL OF RISK AND FINANCIAL MANAGEMENT, vol. 16, no. 12, 2023, doi:10.3390/jrfm16120507.
APA
Beernaert, T., Soenen, N., & Vander Vennet, R. (2023). ECB monetary policy and the term structure of bank default risk. JOURNAL OF RISK AND FINANCIAL MANAGEMENT, 16(12). https://doi.org/10.3390/jrfm16120507
Chicago author-date
Beernaert, Tom, Nicolas Soenen, and Rudi Vander Vennet. 2023. “ECB Monetary Policy and the Term Structure of Bank Default Risk.” JOURNAL OF RISK AND FINANCIAL MANAGEMENT 16 (12). https://doi.org/10.3390/jrfm16120507.
Chicago author-date (all authors)
Beernaert, Tom, Nicolas Soenen, and Rudi Vander Vennet. 2023. “ECB Monetary Policy and the Term Structure of Bank Default Risk.” JOURNAL OF RISK AND FINANCIAL MANAGEMENT 16 (12). doi:10.3390/jrfm16120507.
Vancouver
1.
Beernaert T, Soenen N, Vander Vennet R. ECB monetary policy and the term structure of bank default risk. JOURNAL OF RISK AND FINANCIAL MANAGEMENT. 2023;16(12).
IEEE
[1]
T. Beernaert, N. Soenen, and R. Vander Vennet, “ECB monetary policy and the term structure of bank default risk,” JOURNAL OF RISK AND FINANCIAL MANAGEMENT, vol. 16, no. 12, 2023.
@article{01HV6781K9Z0QVWACJJBDT8KYN,
  abstract     = {{Euro Area banks have been confronted with unprecedented monetary policy actions by the ECB. Monetary policy may affect bank risk profiles, but the consequences may differ for short-term risk versus long-term or structural bank risk. We empirically investigated the association between the ECB’s monetary policy stance and market-perceived short-term and long-term bank risk, using the term structure of default risk captured by bank CDS spreads. The results demonstrated that, during the period 2009–2020, ECB expansionary monetary policy diminished bank default risk in the short term. However, we did not observe a similar decline in long-term bank default risk, since we documented that monetary stimulus is associated with a steepening of the bank default risk curve. The reduction of bank default risk was most pronounced during the sovereign debt crisis and for periphery Euro Area banks. From 2018 onwards, monetary policy accommodation is associated with increased bank default risk, both short-term and structurally, which is consistent with the risk-taking hypothesis under which banks engage in excessive risk-taking behavior in their loan and securities portfolios to compensate profitability pressure caused by persistently low rates. The increase in perceived default risk is especially visible for banks with a high reliance on deposit funding.}},
  articleno    = {{507}},
  author       = {{Beernaert, Tom and Soenen, Nicolas and Vander Vennet, Rudi}},
  issn         = {{1911-8066}},
  journal      = {{JOURNAL OF RISK AND FINANCIAL MANAGEMENT}},
  keywords     = {{Finance,Economics and Econometrics,Accounting,Business, Management and Accounting (miscellaneous)}},
  language     = {{eng}},
  number       = {{12}},
  pages        = {{22}},
  title        = {{ECB monetary policy and the term structure of bank default risk}},
  url          = {{http://doi.org/10.3390/jrfm16120507}},
  volume       = {{16}},
  year         = {{2023}},
}

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