LOLR creates incentive for banks to over-leverage: Netherlands Bank paper

Central banks' lender-of-last-resort function provides banks with an incentive to engage in activities that lead to a deterioration in lending standards, a Netherlands Bank paper, published on Thursday, says.

Mark Mink, the paper's author, combines models on microeconomic bank risk-taking with the overall stance of the macroeconomy to examine why banks' risk-taking intensifies when macroeconomic conditions seem the most prosperous.

Mink finds that when banks are provided with illiquidity

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