This new CEPR eReport is devoted to exploring the general issue of the origins of excessive risk-taking in the banking industry. In doing so, it provides the analytical ammunition required to rigorously examine regulatory policy at a time when it is undergoing a complete metamorphosis.

Risk-taking by banks played a critical role in the global crisis and Eurozone crisis. This column introduces a new eReport that focuses on four aspects of excessive risk-taking by banks, highlighting the causes and the cures. The eReport applies the best available theory and data, bringing together the main insights and views that have emerged from the crisis.

Do low interest rates encourage excessive risk-taking by banks? This column summarises two studies analysing the impact of short-term interest rates on the risk composition of the supply of credit. They find that lower rates spur greater risk-taking by lower-capitalised banks and greater liquidity risk exposure.

Crises are a regular event in financial markets. But do banks that have been hit particularly hard in one crisis learn from the experience and suffer less in future crises? This column suggests not. It shows that banks particularly hard hit by the 1998 financial crisis were also badly affected by the recent financial crisis. It blames the high-risk business models on which these banks rely.

Bonuses are seen as drivers of greed, irresponsibly, and short-sighted behaviour. This column discusses the research on how bonuses affect bankers’ behaviour. It argues that bonuses are a valuable tool for guiding managers to do what’s right for corporations and even society. The debate should be about performance criteria and sustainable goals, not the size of bonus payments.

Do low levels of short-term interest encourage risk-taking that can be considered ‘excessive’? Do low interest rates imply higher credit risk in the short-run? In the medium-run? New empirical research suggests that the answers are a resounding ‘yes’, a subtle ‘no’ and a qualifying ‘it depends’.