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The 2007-2008 crisis highlighted
liquidity management troubles. We witness a real estate asset price boom during
the pre-crisis period and a difficulty for banks to raise funding afterwards. Consequently,
bank choices in response to the conduct of the monetary policy along the cycle can
be studied. Despite usual financial accelerator, the excessive (lack of) confidence
of banks in the upward (down) phase explains procyclical balance sheet movements.
Moreover, the monetary policy effects on bank behaviors vary according to their
initial specifications. From a theoretical point of view, this paper examines the
response of the banking sector to monetary authorities impulses, in function of
their initial characteristics. So, the paper highlights a theoretical model, based
on accounting identities, in which banks are distinguished in different categories
according to their level of capitalization and liquidity. The principal result is
that the less capitalized and liquid banks have more procyclical behaviors.
In the literature, the question of central banks’ responsibility for triggering crises is raised when sustainable low interest rates lead to excessive banks’ risk exposures. However, such portfolio choices mainly depend on the various returns of assets and on the official interest rate, taking into account that the bank lending channel is affected by the bank capital channel. On the basis of a simple theoretical model including a solvency ratio, we show that during recessions a credit rationing is observed together with a flight to quality; during expansions monetary policy can induce both a fall in credit activity and an increase in financial instability. Then, regulatory capital arbitrages appear and still weaken productive loans. Conclusions can be drawn in terms of prudential policy, as the central bank may be powerless face to banking strategies if the regulatory framework is procyclical.