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The impacts of interest rates on banks’ loan portfolio risk-taking

Luiz F.S. Adão, Douglas Silveira, Regis Ely and Daniel O. Cajueiro

Journal of Economic Dynamics and Control, 2022, vol. 144, issue C

Abstract: Using an agent-based model, we investigate how interest rates affects banks’ risk-taking in terms of the profile of their lending to real sector firms. Our agent-based model considers five types of agents: banks, depositors, the Central Bank, firms, and the clearinghouse. Banks are bounded-rational agents with adaptive strategies. In different setups, depositors are either noisy agents or bounded-rational agents that withdraw their deposits when they have concerns over their banks’ solvency. The other players’ behaviors are used as a reference to understand how these main agents respond strategically to different incentives and situations. Some of our findings recover stylized facts available in the literature: (1) when interest rates decrease, there is an increase of real sector loans, particularly for riskier clients; (2) the interbank market plays a fundamental role in banks’ liquidity management; (3) banks avoid borrowing resources from the Central Bank; (4) when the interest rates increase, banks increase the level of capital buffers and the Capital Adequacy Ratio (CAR). We also present new insights regarding the relationship between interest rates and bank risk-taking, opening an avenue to investigate the banks’ learning process dynamics. Finally, working with different parameter sets, we find a rich set of banks’ behaviors in different interest rate regimes.

Keywords: Agent based model; Banking; Loan portfolio; Interest rate; Risk (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jedc.2022.104521

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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