Banks’ Market Capital and the International Risk Taking Channel of Us Monetary Policy

We use a novel granular dataset to demonstrate that banks’ market capital is a key determinant of the strength of the international risk-taking channel of US monetary policy. The impact of US monetary policy on international risk-taking is greater for banks with low market capital. The effect of market capital exists in addition to the previously documented effect of regulatory capital, which works in the opposite direction. As a result, the international risk-taking channel of monetary policy is most powerful for banks that have a combination of high regulatory capital and low market capital. Our findings suggest that the post-GFC strengthening of the international risktaking channel of US monetary policy was likely driven by the combination of declines in market capital and increases in regulatory capital, which most banks experienced after the GFC