The Fed Put and Bank Risk-Taking Evidence from the Loan Book

An, Xudong; Hegde, Saket; Jan, Harren; Kilic, Mete; Ramcharan, Rodney

doi:10.21799/frbp.wp.2025.42

Working Paper

The Fed Put and Bank Risk-Taking Evidence from the Loan Book

Abstract: This paper shows that monetary policy influences bank credit policy through the risk-taking channel. Using option prices on Federal Open Market Committee (FOMC) announcement days, we measure the impact of monetary policy on bank equity tail risks and link them to loan-level regulatory data. Banks that experience a decline in tail risk lend more to riskier firms and ease loan terms in the three weeks after the FOMC announcement. These effects are concentrated among banks with short-term compensation structures and in competitive credit markets. Our results isolate the impact of bank risk-taking in loan supply from confounding forces such as endogenous credit demand and highlight how institutional frictions mediate the risk-taking channel of monetary policy

JEL Classification: E52; G12; G21;

https://doi.org/10.21799/frbp.wp.2025.42