Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200064 
Year of Publication: 
2019
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 21/2019
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
Traditional theory suggests that higher bank profitability (or franchise value) dissuades bank risk-taking. We highlight an opposite effect: higher profitability loosens bank borrowing constraints. This enables profitable banks to take risk on a larger scale, inducing risk-taking. This effect is more pronounced when bank leverage constraints are looser, or when new investments can be financed with senior funding (such as repos). The model's predictions are consistent with some notable cross-sectional patterns of bank risk-taking in the run-up to the 2008 crisis.
Subjects: 
Banks
Risk-Taking
Leverage
Funding Structure
Crises
JEL: 
G21
G24
G28
ISBN: 
978-3-95729-596-5
Document Type: 
Working Paper

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