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Bank risk in a decade of low interest rates

Author

Listed:
  • Yen-Ling Chang

    (Dakota State University)

  • Daniel A. Talley

    (Dakota State University)

Abstract

A low interest rate regime remains in place in the U.S. after the Financial Crisis of 2008. Banks nevertheless need to find ways to boost the economic value to shareholders. This research examine whether it is possible for banks to stay the course and pursue profitable yet riskier assets or investments regardless of the fact that regulators have put restrictions on banks’ asset portfolio formation and capital ratio. This study hypothesizes that banks still engage in highly risky yet profitable investments or services to offset low interest income even after the 2008 Financial Crisis. A panel VAR model and a dynamic GMM model incorporating two structural breaks are employed to examine bank data obtained from the FFIEC from 2003 thru 2014. This study suggests that banks, especially larger banks, still have strong incentives to undertake riskier projects with higher expected returns in order to increase their performance. This has implications for policy makers examining risks inherent to the banking system.

Suggested Citation

  • Yen-Ling Chang & Daniel A. Talley, 2017. "Bank risk in a decade of low interest rates," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(3), pages 505-528, July.
    • Handle: RePEc:spr:jecfin:v:41:y:2017:i:3:d:10.1007_s12197-016-9367-5
    DOI: 10.1007/s12197-016-9367-5
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    Cited by:

    1. Andrea Bellucci & Gianluca Gucciardi, 2023. "A Turning Point for Banking: Unravelling the Changing Landscape of Banking Activity in Europe since the COVID-19 pandemic," Mo.Fi.R. Working Papers 183, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    2. Florian Diener, 2020. "Empirical Evidence of a Changing Operating Cost Structure and Its Impact on Banks’ Operating Profit: The Case of Germany," JRFM, MDPI, vol. 13(10), pages 1-20, October.

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    More about this item

    Keywords

    2008 financial crisis; Bank profitability; Interest rates; Off-balance-sheet activities; Panel VAR; GMM; Multiple structural breaks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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