TY - BOOK ID - 84783756 TI - Bank Profitability and Risk-Taking AU - Martynova, Natalya. AU - Ratnovski, Lev. AU - Vlahu, Razvan. PY - 2015 SN - 1513553739 1513509470 1513565818 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Banks and banking KW - Bank profits KW - Financial risk KW - Business risk (Finance) KW - Money risk (Finance) KW - Risk KW - Bank earnings KW - Profit KW - Agricultural banks KW - Banking KW - Banking industry KW - Commercial banks KW - Depository institutions KW - Finance KW - Financial institutions KW - Money KW - Econometric models. KW - Banks and Banking KW - Finance: General KW - Financial Risk Management KW - Money and Monetary Policy KW - Taxation KW - Investments: Stocks KW - Banks KW - Depository Institutions KW - Micro Finance Institutions KW - Mortgages KW - Investment Banking KW - Venture Capital KW - Brokerage KW - Ratings and Ratings Agencies KW - Financial Institutions and Services: Government Policy and Regulation KW - General Financial Markets: Government Policy and Regulation KW - Taxation, Subsidies, and Revenue: General KW - Financial Crises KW - Monetary Policy KW - Pension Funds KW - Non-bank Financial Institutions KW - Financial Instruments KW - Institutional Investors KW - Public finance & taxation KW - Economic & financial crises & disasters KW - Monetary economics KW - Investment & securities KW - Bank soundness KW - Tax incentives KW - Financial crises KW - Accommodative monetary policy KW - Financial sector policy and analysis KW - Monetary policy KW - Investment banking KW - Financial services KW - Stocks KW - United States UR - https://www.unicat.be/uniCat?func=search&query=sysid:84783756 AB - Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis. ER -