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DO BANKS TAKE UNUSUAL RISKS WHEN INTEREST RATES ARE EXPECTED TO STAY LOW FOR A LONG TIME?

Published online by Cambridge University Press:  14 December 2017

Paul Gaggl  and
Maria Teresa Valderrama
Paul Gaggl*
Affiliation:
University of North Carolina at Charlotte
Maria Teresa Valderrama
Affiliation:
Oesterreichische Nationalbank
*
Address correspondence to: Paul Gaggl, Department of Economics, Belk College of Business, University of North Carolina at Charlotte, 9201 University City Blvd, Charlotte, NC 28223-0001, USA; e-mail: [email protected].
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Abstract

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.

Keywords

Monetary PolicyRisk-TakingFinancial Stability
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 6 , September 2019 , pp. 2409 - 2433
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

Any results presented in this paper reflect our personal opinion and do not represent the official stance of the Oesterreichische Nationalbank (OeNB). In particular, any mistakes or misprints are entirely our responsibility. We are extremely grateful to the OeNB for providing our main data set. In particular, we are greatly indebted to Gerhard Fiam for compiling the raw data set and sharing invaluable know-how with respect to the various underlying data sources. We are further grateful to Costas Arkolakis, Maya Eden, Thanasis Geromichalos, Òscar Jordà, Michal Kowalik, John Leahy, David Marqués Ibañez, Rob Roy McGregor, Steven Ongena, Ankur Patel, Giovanni Peri, Martine Quinzii, Katheryn N. Russ, Kevin D. Salyer, Alan M. Taylor, as well as participants of the 2011 Western Economic Association Meetings, the 2011 European Economic Association Meetings, the 2011 Day Ahead Conference at the Swedish Riksbank, the 2011 Graduate Student Conference at Washington University St. Louis, as well as seminar participants at the Federal Reserve Bank of Kansas City, the ECB, and UC Davis for extremely helpful comments and suggestions.

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