Bank profitability, leverage constraints, and risk-taking
| Authors |
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| Publication date |
10-2020
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| Journal |
Journal of Financial Intermediation
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| Article number |
100821
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| Volume | Issue number |
44
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| Number of pages |
19
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| Organisations |
-
Faculty of Economics and Business (FEB) - Amsterdam Business School Research Institute (ABS-RI)
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| Abstract |
Traditional theory suggests that higher bank profitability (or franchise value) dissuades bank risk-taking. We highlight an opposite effect: higher profitability loosens bank borrowing constraints. This enables profitable banks to take risk on a larger scale, inducing risk-taking. This effect is more pronounced when bank leverage constraints are looser, or when new investments can be financed with senior funding (such as repos). The model’s predictions are consistent with some notable cross-sectional patterns of bank risk-taking in the run-up to the 2008 crisis.
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| Document type |
Article
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| Language |
English
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| Published at |
https://doi.org/10.1016/j.jfi.2019.03.006
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