Bundesbank paper presents new model of banks’ risk-taking
Traditional models make error in assuming that banks choose fixed-size portfolios, authors argue
A working paper published by the Deutsche Bundesbank offers a new model of banks’ decision-making that may explain why profitable lenders take large risks.
In Bank profitability, leverage constraints and risk-taking, Natalya Martynova, Lev Ratnovski, and Razvan Vlahu note that the 2008 financial crisis “revealed a surprising amount of risk-taking in very profitable financial institutions”. They say this behaviour seems to contradict most corporate finance models’ predictions, where shareholders
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