| 09.02.2015

Doctoral Thesis: Low Cost of Funds Can Encourage Bank Risk-Taking – and Lead to Financial Crisis

Rinat Mukminov’s doctoral thesis “Deposit Markets, Lending Markets and Bank Screening Incentives” addresses an unexplored question in the banking literature: How do the banks’ costs of funds – such as deposit interest rate, interbank market interest rate, interest rate on loans from the central bank, etc. – affect the banks’ incentives to screen borrowers? Much of the previous bank screening literature has assumed the cost of funds to be zero, even though in many countries banks have to pay high interest rates in order to raise funds. Moreover, there is evidence in the finance literature that a low cost of funds can encourage bank risk-taking, which could lead to a financial crisis.

“The results indicate that a lower cost of funds encourages the banks to fund more loans but at the same time it gives the banks incentives to reduce their screening effort or to even fund loans without performing any screening at all, leading to a higher credit risk, especially in boom times,” says Mukminov. “This could lead to accumulation of bad loans on the banks’ balance sheets, and defaults of bad loans could result in a credit crunch,” he continues.

A special emphasis is made in the thesis on how different policy makers – such as banking regulators, central banks, government agencies – could use the results of this thesis on different stages of the business cycle: what policy measures could be used in recessions to stimulate lending, what measures could be used in boom times to discourage the banks from excessive risk-taking.

M.Sc. (Econ.) Rinat Mukminov defends his doctoral thesis in Economics: “Deposit Markets, Lending Markets and Bank Screening Incentives” on Friday 13 February.

Time: 13 February 2015, at 12
Place: Room Futurum, Hanken School of Economics, Helsinki
Opponent: Professor Thomas Gehrig, Vienna University, Austria
Custos: Professor Rune Stenbacka, Hanken School of Economics, Finland

For more information, please contact:
Rinat Mukminov
rinat.mukminov@hanken.fi
+358 46 6456248

A copy of the thesis can be downloaded at: http://hdl.handle.net/10138/153134