We assess, through VAR evidence, the effects of monetary policy on banks’ risk
exposure and find the presence of a risk-taking channel. A model combining fragile
banks prone to risk mis-incentives and credit constrained firms, whose collateral
fluctuations generate a balance sheet channel, is used to rationalize the evidence. A
monetary expansion increases bank leverage. With two consequences: on the one side
this exacerbates risk exposure; on the other, the risk spiral depresses output, therefore
dampening the conventional amplification effect of the financial accelerator.
Keywords: monetary policy, bank behavior, leverage, financial accelerator
