Bank risk-taking, securitization, supervision, and low interest rates: Evidence from the Euro-area and the U.S. lending standards

Using a unique dataset of the Euro-area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards for household and corporate loans. This softening - especially for mortgages - is amplified by securitization activity, weak supervision for bank capital, and low monetary policy rates for an extended period. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor rule residuals experienced a worse economic performance afterward. These results help shed light on the origins of the crisis and have important policy implications. © The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.