Banks take more risk in their balance sheets when monetary policy interest rates are lower, according to a working paper published by the Bank of Portugal yesterday, and are more likely to grant "bad borrowers" loans during these periods.

In The risk-taking channel of monetary policy – exploring all avenues, Diana Bonfim and Carla Soares use loan level data to test whether banks assume more credit risk when central banks lower their interest rates.

The authors find that banks, particularly small