September 2015

Risk Taking and Low Longer-term Interest Rates: Evidence from the U.S. Syndicated Loan Market

Sirio Aramonte, Seung Jung Lee, and Viktors Stebunovs


We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These results are consistent with a "search for yield" by certain types of shadow banks and, to the extent that Federal Reserve policies affected longer-term rates, the results are also consistent with the presence of a risk-taking channel of monetary policy. Finally, we find that longer-term interest rates have only a modest effect on loan spreads.

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Keywords: Risk-taking channel of monetary policy, Search for yield, Shadow banking, Shared National Credit Program, Syndicated loans, Zero lower bound


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Last Update: June 19, 2020