The Global Crisis has renewed debate about the relationship between short-term interest rates and bank risk taking. Theory offers ambiguous and conflicting predictions. This column explores the relationship using confidential bank-level data from the US. Bank risk taking is found to be negatively associated with short-term interest rates, and this is more pronounced for highly capitalised banks. These findings can help inform the design of monetary policy.
Giovanni Dell'Ariccia, Luc Laeven, Gustavo Suarez, 02 August 2016
Deniz Anginer, Asli Demirgüç-Kunt, Harry Huizinga, Kebin Ma, 10 November 2013
Bank capitalisation determines the probability of a bank failure. This column discusses how bank’s corporate governance affects its capitalisation. Corporate governance, in which the bank acts in the interest of its shareholders, is defined as a good one. Such governance, however, can lead to lower bank capitalisation. It also has possibly negative implications for financial stability.
Marco Onado, 19 August 2008
Many banks are raising fresh capital but not as fast as they are reporting fresh write-downs. Unless regulators push banks to rebuild their equity bases more quickly, the crisis will be more painful and protracted than necessary. Merrill Lynch is a salutary example.