Event date: 28 November 2018
'Low interest rate environment, bank funding sources, and lending standards'
By Huyen Nguyen (joint work with Jonathan Smith (BoE))
Using proprietary data from the Credit Conditions Survey and Product Sales Database on mortgages, we identify the heterogeneous effects of the low interest rate environment on bank lending standards conditional on banks’ access to alternative funding sources. We first document that lower short-term interest rates induce UK banks to grant riskier loans. We contribute to the literature by showing novel evidence on how this effect is exacerbated when banks have additional sources of low-risk funding. While the Credit Conditions Survey answers the extensity of the effect, loan level data gives us insight into the intensity of the risk taking channel. Our empirical strategy enables us to cleanly separate the interaction between low interest rates and bank funding sources on lending standards from demand, observed and unobserved time varying and bank heterogeneity.
Speaker Affiliation: University of Nottingham (currently at the Bank of England)