David Martinez-Miera, Rafael Repullo, 06 August 2020

The question of whether low interest rates foster or hamper financial stability has recently received ample attention both from policy as well as the academic circles,  leading to the development of a large, mostly empirical, literature on the topic. This column presents a framework to analyse the relevance of the financial sector’s market structure in answering this question. It shows that in markets with low competition lower safe rates result in less risk-taking by financial intermediaries, while in highly competitive markets lower safe rates result in higher risk-taking.

Masayuki Morikawa, 27 February 2020

Japanese listed companies are recruiting many more outside directors to their boards in response to changes in corporate law and governance codes. The column uses data on firm performance to show that these changes have had no impact yet on the risk-taking behaviour or performance of firms. One-size-fits-all regulation may not be in the best interests of all firms.

Marcus Miller, Lei Zhang, 16 August 2019

Externalities can have a powerful effect on financial stability. This column studies the amplification effect that can operate despite value at risk regulation, which suffers from the ‘fallacy of composition’. It shows that the magnitudes of booms and busts are amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. In addition to economic models, legal and political factors should also be considered. 

Roman Goncharenko, Steven Ongena, Asad Rauf, 03 March 2019

Most regulators grant contingent convertible bonds the status of equity. The theory, however, suggests that these securities can distort banks’ incentives to issue new equity. Using a model and European data, this column shows that banks with lower risk are more likely to issue CoCos compared to their riskier counterparts. In line with Basel III, banks are expected to raise equity prior to CoCo conversion, which makes the bonds an expensive source of capital. The design of CoCos should be revised if they are to enjoy equity-like treatment. 

Jose Apesteguia, Joerg Oechssler, Simon Weidenholzer, 29 September 2018

Copy trading platforms, which allow traders on social networks to receive information on the success of other agents in financial markets and to directly copy their trades, have attracted millions of users in recent years. This column examines the implications of copy trading for investors’ risk taking. An experiment reveals that providing information on the success of others significantly increases risk taking, and that this increase is even greater when the option to directly copy others is present. The findings suggest that copy trading platforms may lead to excessive risk taking and reduce ex ante welfare.

Jon Danielsson, Marcela Valenzuela, Ilknur Zer, 26 March 2018

Reliable indicators of future financial crises are important for policymakers and practitioners. While most indicators consider an observation of high volatility as a warning signal, this column argues that such an alarm comes too late, arriving only once a crisis is already under way. A better warning is provided by low volatility, which is a reliable indication of an increased likelihood of a future crisis.


The objective of this course is to present empirical applications (as well as the research methodologies) of relevant questions for both banking theory and policy, mainly related to Systemic Risk, Crises, Monetary Policy and Risk taking behaviour. An important objective is to understand scientific papers in empirical banking; to accomplish this objective, emphasis is placed on illustrating research methodologies used in empirical banking and learning the application of these methodologies to selected topics, such as:

- Securities and credit registers; large datasets

- Fire sales, runs, market and funding liquidity, systemic risk

- Risk-taking and credit channels of monetary policy

- Moral hazard vs. behavioral based risk-taking

- Secular stagnation, banking and debt crises

- Interbank globalization, contagion, emerging markets, policy

Thomas Eisenbach, David Lucca, Robert Townsend, 17 June 2016

The two main elements of bank industry oversight are regulation and supervision. This column provides a framework for thinking about supervision in relation to regulation. Using US data on supervisory hours spent, it finds evidence of economies of scale for bank size. Additionally, less risky banks receive substantially lower amounts of supervisory hours. The findings highlight that supervisors face resource constraints and trade-offs.

Peng Xu, 03 August 2015

Corporate Japan is known for avoiding uncertainty. This is one of the reasons why changes of any kind are difficult – but not impossible – to realise. This column employs firm data to show that foreign direct investment has been changing corporate Japan by pursuing risk taking in private Japanese firms. This risk taking is positively related to firms’ sales growth and corporate earnings.

Matthias Efing, Harald Hau, Patrick Kampkötter, Johannes Steinbrecher, 13 November 2014

Bankers’ bonuses are increasingly regulated but we know little about how they affect risk-taking and value-creation. Based on payroll data from 1.2 million bank employee-years in Austria, Germany, and Switzerland, this column finds evidence that bonuses affect both profits and risk-taking. Policy thus needs to strike a balance and acknowledge the limited regulatory capacity to determine optimal incentives. Higher capital requirements and shareholder empowerment might outperform simple bonus regulations. 


CEPR Policy Research