TY - JOUR
T1 - Real interest rates, leverage, and bank risk-taking
AU - Dell’Ariccia, G.
AU - Laeven, L.
AU - Marquez, R.
PY - 2014
Y1 - 2014
N2 - 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.
AB - 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.
U2 - 10.1016/j.jet.2013.06.002
DO - 10.1016/j.jet.2013.06.002
M3 - Article
SN - 0022-0531
VL - 149
SP - 65
EP - 99
JO - Journal of Economic Theory
JF - Journal of Economic Theory
ER -