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DO BANKS TAKE UNUSUAL RISKS WHEN INTEREST RATES ARE EXPECTED TO STAY LOW FOR A LONG TIME?

Paul Gaggl () and Maria Valderrama ()

Macroeconomic Dynamics, 2019, vol. 23, issue 6, 2409-2433

Abstract: The financial woes that initiated the financial crisis of 2007/08 have, at least in part, been traced to excessive bank risk-taking. What induced this behavior? One explanation is the persistently low short-term interest rates during the mid-2000s. We exploit an extensive panel of matched Austrian banks and firms during 2000–2008 to investigate the effects of the European Central Bank's (ECB) policy of persistently low interest rates during 2003q3–2005q3. Our analysis suggests that this policy likely caused Austrian banks to hold risker loan portfolios than they would have in its absence.

Date: 2019
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