This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we provide evidence of monetary policy's impact on a nonbank financial institution's risk-taking. We find that the search-for-yield is the main driving force of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and greater riskiness of credit allocation. However, these changes do not necessarily relate to a larger loan amount on average.

This study resolves a puzzle in the banking literature: why do an increasing number of countries adopt a deposit insurance scheme (DIS) while prior studies have shown that it increases the likelihood of banking crises? Using a dataset of 64 countries over the period 1970–2009, our study shows that the adoption of a DIS is associated with a 2.0–4.7 percentage points higher likelihood of banking crises (the “direct effect”), while it is associated with a 10.1–11.1 percentage points lower likelihood of non-banking financial crises (the “spillover effect”). Since the “spillover effect” is larger than the “direct effect”, a DIS actually increases overall financial stability. Additionally, we analyze the mechanisms through which a DIS affects financial crises. First, we highlight the existence of the implicit guarantee and examine its interaction with an explicit DIS. Second, we investigate the substitution effect between banking crises and non-banking crises.