Does monetary policy influence risk taking in the banking sector?

‘Too-low-for-too-long' interest rates may lead to a reduction in information asymmetries and bank profits, according to the general consensus. In an attempt to offset the negative impact on their margins, banks may react through a softening in lending standards, increasing the level of risk in their portfolios and the associated probability of failure.

A major assumption underlying this reasoning is that one of the primary motives behind banks’ decisions to ‘search for yield’ lies in their continuous struggle towards profit maximisation. However, to what extent does this assumption hold for financial firms that do not place profit maximisation at the top of their priorities?

We are addressing these issues by examining how the risk-taking behaviours of banks with alternative ownership structures (shareholder versus stakeholder-oriented banks) respond to changes in monetary policy.