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Bank Profitability and Risk-Taking

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by Natalya Martynova & Lev Ratnovski
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Bank Profitability and Risk-Taking by Natalya Martynova & Lev Ratnovski

Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky 'side activities'(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.

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Ebook Details
Pages: 43
Size: 968 KB
Date published:   2015
ISBN: 9781513565811 (DRM-EPUB)
9781513509471 (DRM-PDF)

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This product is listed in the following categories:

Nonfiction > Business & Economics > Economics
Nonfiction > Business & Economics > International > Economics
Nonfiction > Business & Economics > Economics > Macroeconomics

These authors have products in the following categories:

Nonfiction > Business & Economics > Economics > Macroeconomics
Nonfiction > Business & Economics
Nonfiction > Business & Economics > International
Nonfiction > Business & Economics > Insurance > Risk Assessment & Management
Nonfiction > Business & Economics > Banks & Banking
Nonfiction > Business & Economics > Economics
Nonfiction > Business & Economics > International > Economics

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