EconPapers    
Economics at your fingertips  
 

Monetary policy, bank leverage, and financial stability

Fabian Valencia ()

Journal of Economic Dynamics and Control, 2014, vol. 47, issue C, 20-38

Abstract: This paper shows that with limited liability banks lever up excessively to finance new loans. Lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out. When this constrained is relaxed but the bank faces costly dividend adjustment, lower monetary policy rates always worsen risk-taking incentives and the effect is persistent. The reason is that costly dividend adjustment lowers the opportunity cost of lending. In this model, capital requirements are closer to the source of the distortion and thus work better than loan-to-value caps in reducing excessive risk taking.

Keywords: Financial stability; Bank leverage; Risk-taking; Monetary policy; Macroprudential regulation (search for similar items in EconPapers)
JEL-codes: C61 E32 E44 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188914001730
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:47:y:2014:i:c:p:20-38

DOI: 10.1016/j.jedc.2014.07.010

Access Statistics for this article

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

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2022-01-16
Handle: RePEc:eee:dyncon:v:47:y:2014:i:c:p:20-38