Vorlesen

Finance Research Seminar

Wirtschaftsuniversität Wien , Departments 3 D3.0.225 11:00 - 12:30

Art Seminar/Workshop
SpracheEnglisch
Vortragende/rDavid Martinez Miera, University Carlos III de Madrid
Veranstalter Wirtschaftsuniversität Wien Interest Rates, Market Power, and Financial Stability
Kontakt office@vgsf.ac.at

The FRS series informs about the current state-of-the-art research in Finance.

This paper analyzes the effects of safe rates on financial intermediaries’ risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is not observable which creates a moral hazard problem. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We also show that when intermediaries have high market power competition from (nonmonitoring) financial markets results in a U-shaped relationship between policy rates and risk-taking. The paper examines the robustness of these results to introducing heterogeneity in monitoring costs, entry and exit of intermediaries, and funding with deposits and capital.

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