The Impacts of Monetary Policy on Banks' Loan Portfolio Risk-taking

Using an agent-based model, we investigate how monetary policy affects banks' risk-taking in terms of the profile of their lending to real sector firms. Our agent-based model considers five types of agents: banks, depositors, the Central Bank, firms, and the clearinghouse. While banks and depositors are bounded-rational agents with adaptive strategies, the other players' behaviors are used as a reference to understand how these main agents respond strategically to different incentives and situations. Some of our findings recover stylized facts available in the literature: (1) when the monetary policy eases, there is an increase of real sector loans, particularly for riskier clients; (2) the interbank market plays a fundamental role in banks' liquidity management; (3) banks avoid borrowing resources from the Central Bank; (4) when the monetary policy is restrictive, banks increase the level of capital buffers and the Capital Adequacy Ratio (CAR). We also present new insights regarding the relationship between monetary policy stances and bank risk-taking, opening an avenue to investigate the banks' learning process dynamics. Finally, we show that banks tend to grow when the monetary policy stance eases.