For example, a prolonged period of low interest rates, of the sort we
are experiencing today, can create incentives for agents to take on greater
duration or credit risks, or to employ additional financial leverage, in an
effort to “reach for yield.” An insurance company that has offered
guaranteed minimum rates of return on some of its products might find its
solvency threatened by a long stretch of low rates and feel compelled to take on
added risk. A similar logic applies to a bank whose net interest margins are
under pressure because low rates erode the profitability of its deposit-taking
franchise.
Professor Jeremy Stein, governor on the Federal Reserve Board, February 2013
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