has efficiency when changes in the policy rate are transferred to the bank’s
rate of lend, which in turns affects to the aggregate of domestic demand, and
investment, ultimately to the whole output. (Xu & Chen, 2012).The
transmission mechanisms of monetary policy so-called “risk-taking
channels” might operate in a several ways.
It may impact
through the influence of interest rates to the cash flows, input and value of
profitability of the bank. For example low-interest rate increase assets and
profitability as well as income, which in turns could increase risk tolerance
and /or decrease risk sensation. The behavior of default probabilities
evaluation, loss default, correlations, and volatilities are representing the
concentration to the influence of riskiness. The common point that risk
tolerance increases/decreases with wealth by influencing on risk probability.
While the bank risk-taking channels assume its flexibility attitudes against
monetary policy directions (Altunbas et al.2010; Gaggl and Valderrama
2010). And when expansionary monetary
policy 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 and
declining the quality of portfolios (Angeloni et al.2013), where the interest
rate influences not only to the quality but also to the quantity of bank
credit. Thereby it is argued that
monetary policy might promote the financial imbalances.
Because of the
importance of banks in the monetary policy transmission the bank risk-taking
channels especially credit channel is the main provider of monetary policy
risk-taking channels. In credit channel, a low-interest rate increases assets
value, as well as the attention of the borrowers and, improves repayment
conditions. Such circumstances increase the banks’ willingness to supply more
loans. Moreover, when central banks as the main driver of monetary policy
provide more money to the commercial branches with low refinancing rate, banks
have an ability to respond to the borrowers by lending them more loans, which
increases the banks’ risk.