Interest rates and risk-taking

Vasso P. Ioannidou and others look at the relationship between the level of short term interest rates and the amount of risk that a bank is prepared to take using a natural experiment in Bolivia (where the economy is dollarised and therfore monetary policy is set outside). They find that banks take more risk when interest rates are low: lending standards decline and ex-post default rates rise. However, banks do not charge more for the increased risk.