Monetary Policy, Leverage, and Bank Risk-Taking

By Giovanni Dell'Ariccia, Luc Laeven, Robert Marquez. Social Science Research Network, 2010

181 citations recorded by the source corpus.

The recent global financial crisis has ignited a debate on whether easy monetary conditions can lead to greater bank risk-taking. We study this issue in a model of leveraged financial intermediaries that endogenously choose the riskiness of their portfolios. When banks can adjust their capital structures, monetary easing unequivocally leads to greater leverage and higher risk. However, if the capital structure is fixed, the effect depends on the degree of leverage: following a policy rate cut, well capitalized banks increase risk, while highly levered banks decrease it. Further, the capitalization cutoff depends on the degree of bank competition. It is therefore expected to vary across countries and over time.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/efb30764bcae620d28f2fef24e79b38f38dc2457

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Ignazio Angeloni
2. M. Duca
3. Frank Smets
4. Ester Faia
5. C. Walsh
6. G. Peersman
7. Nikolay Iskrev
8. Michael Ehrmann

In Finance

1. Ignazio Angeloni
2. Frank Smets
3. M. Duca
4. Ester Faia
5. Michael Ehrmann
6. G. Peersman
7. Barbara Roffia
8. L. Gambacorta

Citations in the corpus

• In Search for Yield? Survey-Based Evidence on Bank Risk Taking (2014, unknown): “In the second extension, Dell’Ariccia et al. (2010) model adjustment of banks under the assumption of perfect competition versus monopoly power of banks.”
• Monetary policy and risk taking (2015, background): “So far, the literature has offered some examples of partial equilibrium static models featuring banks’ risk taking: from the classic work of Allen and Gale [7], to, more recently, Acharya and Naqvi [2], Agur and Demertzis [3], Dell’Ariccia, Laeven and Marquez [34], De Nicolo’ et al.”
• Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe (2017, unknown): “…an increase in the expected riskiness of the bank’s balance sheet; Dell’Ariccia et al. (2017) show that, in line with theoretical predictions by Dell’Ariccia et al. (2014), while indeed risktaking in new loans is higher when real policy interest rates are low, this effect is lower for weakly…”
• Financial Stability and Monetary Policy: How Closely Interlinked? (2014, result): “Banks that are sufficiently capitalised do not suffer from the risk-taking incentive when interest rates are low, consistent with the theoretical findings of the risk-shifting channel by Dell’Ariccia et al. (2010). One important question is whether these results are macro-economically relevant. Madd”