Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia

Publication | January 2014

“Too low” interest rates can be harmful to the economy. Banks take on more risk when interest rates are kept too low—evidence that supports the presence of the bank risk-taking channel.

Events surrounding the global financial crisis have brought to light the potential role of monetary policy in precipitating the crisis. Numerous studies on advanced economies have documented a significant negative relationship between interest rates and bank risk-taking. This paper also finds the presence of the risk-taking channel based on a panel of publicly listed bank data in Asia. Using both annual and quarterly data, "too low" interest rates are found to lead to an increase in bank risk-taking.

Contents 

  • Abstract
  • Introduction
  • Literature: Theory and Evidence
  • Model Specification
  • Data and Estimation Issues
  • Results
  • Conclusion
  • References
  • Appendix

Additional Details

Authors
Type
Series
Subjects
  • Finance sector development
  • Banking and non-bank financial institutions
SKU
  • WPS136167

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