I use loan-level data from the syndicated loan market in the U.S. to investigate how monetary policy affects banks’ sensitivity to risk. Using loan-level data and banks’ sensitivity to risk enables me to identify the risk-taking channel and disentangle it from other monetary channels. I show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks’ sensitivity to risk. I then provide evidence for the significant contribution of risk-taking shocks and changes in banks’ risk-taking behavior to economic outcomes and business cycle fluctuations. The paper’s primary contribution is in providing new loan-level evidence for the existence of the risk-taking channel in the U.S., as well as a possible link between the risk-taking channel and business cycle fluctuations.

This paper examines how competition in the banking sector affects the transmission of monetary policy and the variation of credit expansion across regions in the United States. Using the U.S. branching deregulation between 1994 to 2008 as an exogenous change in banks’ competition, we analyze how bank competition affects monetary policy transmission through the bank lending channel. The results show that competition strengthens the impact of monetary policy on bank loan supply. We then show that states with a more deregulated banking sector were more affected by monetary conditions in the years leading to the Great Recession. Specifically, the effect of loose monetary conditions on the expansion of households’ debt was stronger in states that had fewer bank branching restrictions. The results suggest that variations in the level of bank competition may have amplified regional asymmetries in the years leading to the Great Recession.