Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/206545 
Year of Publication: 
2019
Series/Report no.: 
BERG Working Paper Series No. 153
Publisher: 
Bamberg University, Bamberg Economic Research Group (BERG), Bamberg
Abstract: 
We investigate the relationship between monetary policy and banks' risk-taking behavior. We study a general equilibrium model in which a risk averse bank credits firms and also manages a portfolio consisting of a risky and a risk-free asset. When a bank signs up credit contracts with firms, it takes into account their solvency and potential gains from outside investment strategies. We show that the bank's asset/liability and risk management depend on the prevailing policy rate. However, low policy rates incentivizes a bank to search-for-yield by re-allocating their asset portfolios towards more risky exposures ultimately leads to under-capitalized positions. This renders the financial sector more vulnerable.
ISBN: 
978-3-943153-74-3
Document Type: 
Working Paper

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