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

Benjamin Lojak, Tomasz Makarewicz and Christian Proaño

No 153, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

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.

Date: 2019
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Citations: View citations in EconPapers (5)

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Journal Article: Low interest rates, bank’s search-for-yield behavior and financial portfolio management (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:153

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