Real interest rates, leverage, and bank risk-taking

Giovanni DellʼAriccia, Luc Laeven and Robert Marquez

Journal of Economic Theory, 2014, vol. 149, issue C, 65-99

Abstract: Do low interest rate environments lead to greater bank risk-taking? We show that, when banks can adjust their capital structures, reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function. However, if the capital structure is fixed, the effect depends on the degree of leverage: following a decrease in interest rates, well capitalized banks increase risk, while highly levered banks may decrease it if loan demand is linear or concave. Further, the capitalization cutoff depends on the degree of bank competition. This effect therefore should vary across countries and over time.

Keywords: Real interest rates; Leverage; Risk taking; Banking crises; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (240)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:149:y:2014:i:c:p:65-99

DOI: 10.1016/j.jet.2013.06.002

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