The Impact of Monetary Policy Shocks on Financial Sector Risk Exposure

Abstract

This study examines how monetary policy shocks influence financial sector risk exposure through a systematic literature review of empirical research. The review synthesizes evidence on how changes in policy rates and central bank balance sheet policies affect bank leverage, asset quality, funding structures, and financial stability indicators in advanced and emerging economies. The findings show that accommodative monetary policy often increases credit, market, and insolvency risk, particularly in competitive banking systems and environments with weak macroprudential regulation, while tighter policy can curb risk taking but temporarily heighten liquidity and market risk. The results also indicate that the impact of monetary policy shocks is context dependent, shaped by market structure, capitalization, policy uncertainty, and institutional frameworks. Several studies identify a transmission channel through shifts in investors’ risk appetite and cross border capital flows, which link monetary policy surprises to asset price volatility and risk taking by banks and non bank intermediaries. Overall, the review underscores the need to coordinate monetary and macroprudential policies to contain excessive risk while preserving monetary transmission.