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Monetary Policy, Leverage, and Bank Risk-Taking

Giovanni Dell'ariccia (), Luc Laeven () and Robert Marquez

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: The recent global financial crisis has ignited a debate on whether easy monetary conditions can lead to greater bank risk-taking. We study this issue in a model of leveraged financial intermediaries that endogenously choose the riskiness of their portfolios. When banks can adjust their capital structures, monetary easing unequivocally leads to greater leverage and higher risk. However, if the capital structure is fixed, the effect depends on the degree of leverage: following a policy rate cut, well capitalized banks increase risk, while highly levered banks decrease it. Further, the capitalization cutoff depends on the degree of bank competition. It is therefore expected to vary across countries and over time.

Date: 2010-12
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Related works:
Working Paper: Monetary Policy, Leverage, and Bank Risk-taking (2011) Downloads
Working Paper: Monetary Policy, Leverage, and Bank Risk Taking (2010) Downloads
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