Interest rates and bank risk-taking

Abstract

In a recent line of research the low interest-rate environment of the early to mid 2000s is viewed as an element that triggered increased risk-taking appetite of banks in search for yield. This paper uses approximately 18,000 annual observations on euro area banks over the period [2001][2002][2003][2004][2005][2006][2007][2008] and presents strong empirical evidence that low interest rates indeed increase bank risk-taking substantially. This result is robust across a number of different specifications that account, inter alia, for the potential endogeneity of interest rates and/or the dynamics of bank risk. Notably, among the banks of the large euro area countries this effect is less pronounced for French institutions, which held on average a relatively low level of risk assets. Finally, the distributional effects of interest rates on bank risk-taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off-balance sheet items.

Competition and financial stability in European cooperative banks

“…Several works have tested the relationship between banking market structure and risk focusing on credit risk (Hakenes, and Schnabel, 2010;Fiordelisi et al, 2011), interest rate risk (Delis and Kouretas, 2011) or the broader default risk (Repullo, 2004;Schaeck et al, 2009, Berger et al, 2009Jiménez et al, 2010; Turk Ariss, 2010) providing mixed evidence. For instance, Boyd et al (2006) There are just few papers loosely related to the research questions addressed in the present study.…”

Political Connection, Management Promotion and Risk Taking Activities

“…When the asset substitution benefit surpassed the managerial entrenchment benefit, the risks tended to increase. Delis and Kouretas (2010) found that the level of interest rates of most banks in Europe was negatively correlated with the risk-taking activities of the banks [6]. Low level of interest rates could spur the banks to undertake risk-taking activities.…”

The Moderating Role of Corporate Governance on the Relationship between a Firm’s Product Lifecycle and Risk-Taking

“…Higher levels of profits might be expended to seek new loans and investments in the next period. In contrast, excessive high risks might lead to issues with loans and lower profitability that will eventually imply fewer risk assets in the next period (Delis & Kouretas 2011).…”