Macroeconomic conditions and bank risk-taking in Australia

The aim of this study is to investigate the relationship between bank risk taking and the macro-economic environment in Australia, at institution level, from July 2002 till December 2015. There are strong arguments in economic theory suggesting that macroeconomic conditions may have significant impacts on the risk-taking behavior among banks. This thesis uses about 8100 monthly observations of Australia banks from July 2004 to December 2015 to study the empirical relationship between the macro environment and bank risk-taking behavior. The results of this study find relationships between general macro indicators and bank risk taking behavior are varying with different types of bank, time frame and with different proxy for bank risk taking. Interest rates and in particular the prolonged low interest rate environment does encourage bank increase the portion of risky assets to total assets through housing market loans. This makes banks more reliant on lending for housing and hence more risky propositions.