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Working Paper
Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation
This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank?s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is ...