From gnome-land:
Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks’ risk.
I wonder why no one ever talks about the relationship between IBanks (ie the car salesman) and Commercial Banks (ie the keepers of big balance sheets with lots of capital). Ever since the two have been brought together and where Commercial Banks began to be run by IBankers did we start to see high levels of risk underpinning Bank Balance sheets.
The chickens were be guarded by wolves. The traditional culture betw these two types of institutions were historically, quite different. But when the wolves took over — look out.
Same behavior going on in insurance, industrial conglomerates (e.g. GE) etc. Enron. These institutions began to take on the flavor of unregulated banks. Where doing the deal was the focus of business
As far as the thesis above. Does this mean high interest rates lead to lower levels of risk? I think the big failing of this paper is that it doesn’t establish causality. Does easy credit = low interest rates. I don’t know, but off the top of my head there was more going on here. A basic assumption pervaded the market –”There is no risk, it’s a different world now — business cycle, what business cycle?”. Pure focus on short term gain, less recognition of long term implications.
What motivated banks to take on ever and ever increasing amounts of exposure, based on assumption of little or no risk? The chance to get rich and make alot of money. There is a huge “Agency Risk” problem here. The exposure to risk by those making the decisions was small.
Banks are full of kids with MBA’s with little to no experience making boatloads of money. In that environment do you think risk managers have much say. Nope! Look at the background of the guys running Lehman! Border line sociopaths. Did they understand what they were selling or buying. The answer is no.