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Real interest rates, leverage, and bank risk-taking

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  • DellʼAriccia, Giovanni
  • Laeven, Luc
  • Marquez, Robert

Abstract

Do low interest rate environments lead to greater bank risk-taking? We show that, when banks can adjust their capital structures, reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function. However, if the capital structure is fixed, the effect depends on the degree of leverage: following a decrease in interest rates, well capitalized banks increase risk, while highly levered banks may decrease it if loan demand is linear or concave. Further, the capitalization cutoff depends on the degree of bank competition. This effect therefore should vary across countries and over time.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 149 (2014)
Issue (Month): C ()
Pages: 65-99

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Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:65-99

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Real interest rates; Leverage; Risk taking; Banking crises; Monetary policy;

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References

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Citations

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Cited by:
  1. Olivier Bruno & André Cartapanis & Eric Nasica, 2014. "Bank Leverage, Financial Fragility and Prudential Regulation," GREDEG Working Papers 2014-12, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  2. Abbate, Angela & Thaler, Dominik, 2014. "Monetary policy effects on bank risk taking," Economics Working Papers ECO2014/07, European University Institute.
  3. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.

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