Title: A toxic cocktail: Low interest rates and banks' search-for-yield behavior
Authors: Benjamin Lojak - University of Bamberg (Germany) [presenting]
Christian Proano - University of Bamberg (Germany)
Tomasz Makarewicz - University of Bamberg (Germany)
Abstract: The relationship between expansionary monetary policy and banks' risk taking behavior is investigated. We study a model in which risk averse banks credit firms and also manage a portfolio consisting of a risky and a risk-free asset. When banks fund firms they take into account their solvency and potential gains from outside investment strategies. We show that low policy rates induce banks to search-for-yield through the softening of lending standards, incentivizes firms to take on riskier positions and increases asset price volatility that renders the financial markets more unstable.