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Low interest rates, bank's search-for-yield behavior and financial portfolio management

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  • Lojak, Benjamin
  • Makarewicz, Tomasz
  • Proaño Acosta, Christian

Abstract

We investigate the relationship between monetary policy and banks' risk-taking behavior. We study a general equilibrium model in which a risk averse bank credits firms and also manages a portfolio consisting of a risky and a risk-free asset. When a bank signs up credit contracts with firms, it takes into account their solvency and potential gains from outside investment strategies. We show that the bank's asset/liability and risk management depend on the prevailing policy rate. However, low policy rates incentivizes a bank to search-for-yield by re-allocating their asset portfolios towards more risky exposures ultimately leads to under-capitalized positions. This renders the financial sector more vulnerable.

Suggested Citation

  • Lojak, Benjamin & Makarewicz, Tomasz & Proaño Acosta, Christian, 2019. "Low interest rates, bank's search-for-yield behavior and financial portfolio management," BERG Working Paper Series 153, Bamberg University, Bamberg Economic Research Group.
  • Handle: RePEc:zbw:bamber:153
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    1. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Macroeconomic Models with Equity and Credit Rationing," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 15-42, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Christoph March & Marco Sahm, 2019. "The Perks of Being in the Smaller Team: Incentives in Overlapping Contests," CESifo Working Paper Series 7994, CESifo.

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