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Global Imbalances and Bank Risk-Taking

Daniel Marcel te Kaat and Valeriya Dinger

Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: Financial crises are usually preceded by large current account deficits. However, the channel through which international capital flows affect financial stability is hardly identified, yet. In this paper, we study the impact of current account balances on bank risk-taking making use of the exogenous and huge variation in capital flows within the euro area between the years 2001 and 2012. We find that bank risk-taking is positively associated with current account deficits. We provide a series of tests showing that this is the case both because banks in countries with large external deficits substitute new investments in asset markets (e.g. sovereign debt) with loans that are typically riskier and because the average quality of bank loans deteriorates.

JEL-codes: F32 F41 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ban and nep-opm
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112866

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