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Procyclical Bank Risk-Taking and the Lender of Last Resort

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  • Mark Mink

Abstract

We show that through facilitating maturity transformation, the lender of last resort gives banks an incentive to lever, diversify, and lower their lending standards. Bank leverage increases shareholder value because maturity transformation effectively allows banks to borrow against lower interest rates than their shareholders. Bank diversification increases shareholder value by enabling banks to lever more. When the gains from maturity transformation are passed on to bank customers, lending standards deteriorate. This risk-taking intensifies when the term spread is steeper, and is thus procyclically related to the stance of the macro-economy. Regulatory liquidity requirements can reduce all forms of risk-taking examined.

Suggested Citation

  • Mark Mink, 2011. "Procyclical Bank Risk-Taking and the Lender of Last Resort," DNB Working Papers 301, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:301
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    File URL: https://www.dnb.nl/en/binaries/working%20paper%20301_tcm47-255229.pdf
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    References listed on IDEAS

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    Cited by:

    1. de Haan, Leo & van den End, Jan Willem, 2013. "Bank liquidity, the maturity ladder, and regulation," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3930-3950.
    2. Alin Marius ANDRIES & Vasile COCRIS & Ioana PLESCAU, 2015. "Low Interest Rates And Bank Risk-Taking: Has The Crisis Changed Anything? Evidence From The Eurozone," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 15, pages 125-148, June.

    More about this item

    Keywords

    bank risk-taking; procyclicality; lender of last resort; financial regulation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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