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CREDIT RISK AND THE ZERO LOWER BOUND ON INTEREST RATES 12

By Kalin Nikolov, A Real-time Dataset, Matteo Ciccarelli, De Fiore and Oreste Tristani

Abstract

Asset price bubbles are considered to be a major risk to financial stability. In this article, we show that an asset price bubble poses a bigger risk when banks are exposed to it. This is because when the bubble bursts, banks realise losses and this may trigger bank failures and a credit crunch. In contrast, when overvalued assets are held by ordinary savers, the consequences for financial stability are less severe. We show that low bank profitability and a generous financial safety net for banks are important determinants in their decisions to take risks

Year: 2012
OAI identifier: oai:CiteSeerX.psu:10.1.1.220.5990
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