Lowering interest rates makes it more likely that banks will make risky investments, according to research published by the Bank of England.

In his paper Interest rates, capital and bank risk-taking, Jonathan Acosta-Smith analyses the link between interest rates and risk-taking.

He uses a model in which banks raise funds from depositors to create an investment portfolio. His results show lowering the interest rate makes it more likely banks will make risky investments. Reducing the interest