Low interest rates, bank’s search-for-yield behavior and financial portfolio management

We investigate the relationship between monetary policy and banks’ risk-taking behavior. set up a simple model in which risk averse bank awards loans to firms also manages financial investment portfolio consisting of risky risk-free asset. When signs credit contracts with firms, it takes into account their solvency potential gains from outside strategies under aversion, contrast standard approach neutral preferences. show that bank’s asset/liability management depend on prevailing rate. However, low rates incentivize engage search-for-yield by re-allocating asset portfolios towards more exposures ultimately leads under-capitalized positions, an increased sector vulnerability.