We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk … taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the … structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed …

We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our … sovereign debt discount. We introduce long term government debt, which gives rise to the possibility of capital losses on bank … intermediaries causes bond prices to drop triggering capital losses at the bank under intervention. This mechanism shows the limits …

We develop a model of bank risk-taking with strategic sovereign default risk. Domestic banks invest in real projects … their default risks through purchases of bonds. But, for high debt levels, this influence is lost since bank and government …