Bank Risk-Taking, Securitization, Supervision, and Low Interest Rates: Evidence from Lending Standards

The financial woes that initiated the financial crisis of 2007/08 have, at least in part, been traced to excessive bank risk-taking. What induced this behavior? One explanation is the persistently low short-term interest rates during the mid-2000s. We exploit an extensive panel of matched Austrian banks and firms during 2000–2008 to investigate the effects of the European Central Bank's (ECB) policy of persistently low interest rates during 2003q3–2005q3. Our analysis suggests that this policy likely caused Austrian banks to hold risker loan portfolios than they would have in its absence.

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Risk-taking behavior, earnings quality, and bank performance: A profit frontier approach

BRQ Business Research Quarterly ◽

10.1177/2340944420966870 ◽

2020 ◽

Vol 23 (4) ◽

pp. 285-304

Author(s):

M. Pilar García-Alcober ◽

Diego Prior ◽

Emili Tortosa-Ausina ◽

Manuel Illueca

Keyword(s):

Financial Crisis ◽

Interest Rates ◽

Risk Taking ◽

Banking System ◽

Jel Classification ◽

Bank Risk ◽

Bank Performance ◽

Bank Efficiency ◽

Savings Banks ◽

Risk Taking Behavior

After the financial crisis of 2007–2008, some bank performance dimensions have been the subject of debate, two of which are bank efficiency and bank risk-taking behavior. The literature on bank efficiency and productivity has grown considerably over the past three decades, and has gained momentum in the aftermath of the financial crisis. Interest in bank risk-taking behavior, usually focusing on its links to monetary policy, has been relatively low, but has also increased exponentially in more recent years. This article combines these two streams of research. Specifically, we test whether more inefficient banks take greater risks when selecting borrowers, charging interests, and requiring collateral, and whether these links between inefficiency and risk change according to the type of bank. Our analysis centers on the Spanish banking system, which has been severely affected by the burst of the housing bubble and has undergone substantial restructuring. To test our hypotheses, we created a database with information on banks and savings banks, their borrowers (non-financial firms), and the links between them. The study also contributes to the literature by considering a novel profit frontier approach. Our results suggest that more inefficient banks take greater risks in selecting their borrowers, and that this high-taking behavior is not offset by higher interest rates. JEL CLASSIFICATION C14; C61; G21; L50

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Low interest rates and executive risk-taking incentives: Evidence from the United States

BRQ Business Research Quarterly ◽

10.1177/2340944420927716 ◽

2020 ◽

pp. 234094442092771

Author(s):

Paula Castro ◽

Maria T Tascon ◽

Francisco J Castaño ◽

Borja Amor-Tapia

Keyword(s):

United States ◽

Interest Rates ◽

Risk Taking ◽

The United States ◽

Jel Classification ◽

Short Term ◽

Monetary Policies ◽

Stock Return Volatility ◽

Low Interest Rates ◽

Institutional Shareholders

This article contributes to the literature by indicating how certain monetary policies impact the compensation incentives of US managers to adopt riskier business policies. Specifically, based on the agency problems between shareholders and managers and between shareholders and creditors, a research framework is developed to identify the influence of low interest rates on managers’ risk-taking incentives proxied by the sensitivity of executive compensation to stock return volatility (Vega). We examine 1,293 firms in the United States between 2000 and 2016, and the results indicate that low interest rates increase the managers’ short-term risk-taking incentives and that those incentives contribute to the risk effectively taken by the firm. Our results are robust to the use of alternative monetary proxies and to the presence of passive versus active institutional shareholders. JEL CLASSIFICATION E41; E43; E51; M12; M52

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