Risk taking channel and efficiency of monetary policy in Türkiye

The Global Financial Crisis has shown that failures in financial markets could create crucial problems not only in developing economies, but also in developed economies. The crisis starting with the bubble in asset prices and excessive credit expansion in the USA led to the deterioration of financial stability throughout the world economy. Prolonged low-interest rates were cited as one of the reasons for this crisis, and it was argued that the liquidity abundance in the markets accelerated the banks' willingness to undertake risk. The risk-taking channel states that the expansionary monetary policy affects the risk perception of the banks and directs them to take riskier positions in their portfolios. In this study, the existence and strength of the risk-taking channel of monetary policy in Türkiye for the period 2003 – 2021 are analyzed. For this purpose, depending on the New Keynesian foundations, a dynamic stochastic general equilibrium model representing a closed economy with no government has been developed. Modeling flow of the funds derived from the behaviors of a representative household, firm, bank, and central bank under constrained maximization conditions is realized. After the equilibrium solution of the model under perfect competition conditions, risk-taking indicators for the banking system have been obtained and their theoretical responses to monetary policy shocks have been analyzed. This solved model was then estimated with Bayesian VAR methodology and it was determined that the risk-taking indicators in question gave statistically significant responses in accordance with our theoretical expectations. Estimation results confirm the existence of the bank risk-taking channel in Türkiye and also indicate that the decrease in the policy rate directs the banking system to take on more risk. We also found that the response of risk-taking behavior of the banks to a credit interest rate shock is stronger than that of a policy rate shock. As the final conclusion of the study, we prove that low-interest rates in the Turkish economy strengthen the risk-taking behavior of banks.