01933cas a2200265 a 4500 AALejournalIMF016422 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513517582 1018-5941 BD-DhAAL BD-DhAAL Martynova, Natalya. Bank Profitability and Risk-Taking / Natalya Martynova, Lev Ratnovski, Razvan Vlahu. Washington, D.C. : International Monetary Fund, 2015. 1 online resource (43 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students 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. Mode of access: Internet Ratnovski, Lev. Vlahu, Razvan. IMF Working Papers; Working Paper ; No. 2015/249 Full text available on IMF http://elibrary.imf.org/view/journals/001/2015/249/001.2015.issue-249-en.xml IMF e-Library