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
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 2000â€“2008 to investigate the effects of the European Central Bank's (ECB) policy of persistently low interest rates during 2003q3â€“2005q3. Our analysis suggests that this policy likely caused Austrian banks to hold risker loan portfolios than they would have in its absence.
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