Bundesbank paper presents new model of banks’ risk-taking

Deutsche Bundesbank headquarters, Frankfurt
The Deutsche Bundesbank
Fabian Stürtz

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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