Bank Risk-Taking in a Small Open Economy

No 2019-016, Working Papers from Banco Central de Reserva del Perú

Abstract: I develop an open economy model with banks facing foreign borrowing limits. The interaction of banks' limited liability and deposit insurance leads banks into socially excessive risk-taking, which involves credit volume and not the type of credit. The novel result is that, under a realistic calibration, a lower foreign interest rate reduces the excessive bank risk-taking. Since the foreign borrowing limit is binding, this lower rate does not boost banks' credit, but rather decreases it, since for a given capital the lower rate reduces the default probability of banks, which diminishes their risk-taking incentives. Through the same mechanism, a greater access to the international credit markets reduces the excessive risk-taking by banks. Hence, less banking regulation to achieve socially efficient risk-taking is required after a foreign rate reduction and a higher foreign borrowing limit.

Keywords: Macroprudential policies; financial stability; monetary policy and bank risk-taking. (search for similar items in EconPapers)
JEL-codes: E44 E52 F41 G01 G21 G28 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.bcrp.gob.pe/docs/Publicaciones/Documen ... trabajo-016-2019.pdf Application/pdf
Our link check indicates that this URL is bad, the error code is: 555 Security Page

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2019-016

Access Statistics for this paper

More papers in Working Papers from Banco Central de Reserva del Perú Contact information at EDIRC.
Bibliographic data for series maintained by Research Unit ().