Interest rate policies pursued by central banks since the global financial crisis have created concern that low policy rates are encouraging financial intermediaries to increase risky investments. Professor Malik Shukayev and coauthors Simona Cocuiba (University of Western Ontario) and Alexander Ueberfeldt (Bank of Canada) have studied how a central bank's interest rate policy affects risk taking via its effect on the price of collateral in the interbank market.
Low interest rates make riskier assets more attractive relative to safe bonds. On the other hand, at low interest rates, the amount of safe bonds available falls, so there are fewer assets available as collateral for borrowing. Professor Shukayev's research finds, overall, that at low interest rates financial intermediaries allocate few resources to safe assets and the resulting scarcity of collateral provides a safeguard against increased risk taking through the interbank market.
For more on this study, see the working paper Collateralized Borrowing and Risk Taking at Low Interest Rates.