Real interest rates, leverage, and bank risk-taking

G. Dell’Ariccia, L. Laeven, R. Marquez

Research output: Contribution to journalArticleScientificpeer-review

109 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)65-99
JournalJournal of Economic Theory
Volume149
DOIs
Publication statusPublished - 2014

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