tailieunhanh - Monetary Policy, Leverage, and Bank Risk-Taking∗

The second result underlines the interest of a two-factor model rather than a one factor model to represent the stochastic dynamics of interest rates. For example, Balduzzi, Das and Foresi (1998) show the presence of a stochastic central tendency in the dynamics of the short and long term interest rates which explains that the level of the short rate is not the only relevant variable to describe its conditional mean. For the United States between 1951 and 2001, King and Kurmann (2002) demonstrate the impact of this permanent component (stochastic trend) on the long-term interest rate dynamics. On the contrary, the spread depends more on the di§erence between. | Monetary Policy Leverage and Bank Risk-Taking Giovanni Dell Ariccia IMF and CEPR Luc Laeven IMF and CEPR Robert Marquez Boston University December 2010 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. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF. We thank Olivier Blanchard Stijn Claessens Gianni De Nicolo Hans Degryse Kenichi Ueda Fabian Valencia and seminar participants at Boston University Harvard Business School Tilburg University the Dutch Central Bank and the IMF for useful comments and discussions. Address for correspondence Giovanni Dell Ariccia IMF 700 19th Street NW Washington DC USA. gdellariccia@ 1 Introduction The recent global financial crisis has brought the relationship between monetary policy and bank risk taking to the forefront of the economic policy debate. Many observers have blamed loose monetary policy for the credit boom and the ensuing crisis in the late 2000s arguing that in the run up to the crisis low interest rates and abundant liquidity led financial intermediaries to take excessive risks by fueling asset prices and promoting leverage. The argument is that had monetary authorities raised interest rates earlier and more aggressively the consequences of the bust would have been much less severe. More recently