Collateralized Borrowing and Risk Taking at Low Interest Rates?

Simona Cociuba (), Malik Shukayev () and Alexander Ueberfeldt

No 20121, University of Western Ontario, Economic Policy Research Institute Working Papers from University of Western Ontario, Economic Policy Research Institute

Abstract: A view advanced in the aftermath of the late-2000s fi?nancial crisis is that lower than optimal interest rates lead to excessive risk taking by fi?nancial intermediaries. We evaluate this view in a quantitative dynamic model where interest rate policy affects risk taking through two channels. First, policy influences the attractiveness of safe bond investments relative to riskier assets. Moreover, policy changes the amount of safe bonds available for collateralized borrowing in interbank markets. In this framework, collateral constraints provide a safeguard against increases in risk taking. Lower than optimal policy rates lead to tighter collateral constraints and reduce risk taking.

Keywords: financial intermediation; risk taking; optimal interest rate policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 G18 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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Journal Article: Collateralized borrowing and risk taking at low interest rates (2016)
Working Paper: Collateralized Borrowing and Risk Taking at Low Interest Rates (2016)
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