Monetary Policy, Leverage, and Bank Risk-Taking

42 Pages Posted: 31 Jan 2011

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Robert Marquez

University of California, Davis

Multiple version iconThere are 3 versions of this paper

Date Written: January 2011

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.

Keywords: banking, leverage, monetary policy, risk taking

JEL Classification: E44, E58, G21

Suggested Citation

Dell'Ariccia, Giovanni and Laeven, Luc A. and Marquez, Robert S., Monetary Policy, Leverage, and Bank Risk-Taking (January 2011). CEPR Discussion Paper No. DP8199. Available at SSRN: https://ssrn.com/abstract=1749820

Giovanni Dell'Ariccia (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

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