The "Greatest" Carry Trade Ever? Understanding Eurozone Bank Risks

Viral Acharya, Sascha Steffen, Sun, 04/21/2013

This paper argues that the European banking crisis can in part be explained by a “carry trade” behavior of banks. The results are supportive of moral hazard in the form of risk-taking by under-capitalized banks to exploit low risk weights and central-bank funding of risky government bond positions.

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URL: www.cepr.org/pubs/dps/DP9432.asp

Topics: International finance

Tags: Banking crisis, sovereign-debt crisis, risk shifting, regulatory arbitrage, home bias