Bank risks, risk preferences and lending

The recent debate on the impact of capital regulation on bank behaviour shows that risk exposures of banks might influence the amount of loans newly granted to the non-financial sector. The paper extends the traditional set of bank-specific variables used in testing for the bank lending channel and points to the role of financial stability analysis in the conduct of monetary policy. This role stems from the fact that the financial instability can influence the monetary transmission mechanism. The implications of the presented reasoning are tested using the data for the Polish banking sector during the period 1997-2004. The variables proxying bank risk preferences and the level of risk undertaken (also when interacted with a monetary policy measure) are significant in regressions explaining changes in the amount of bank loan supply.