These focus instead on the interest rate, credit or bank lending channels. Now, how does this risk-taking channel work? Well, it can work in different ways. For a start, low interest rates mean low returns. Investors might rebalance their portfolios and take on more risk in order to make up for lost returns. Should we be concerned about this?
Well, if the process is well managed, there is no need for concern. However, some financial institutions set rather inflexible target rates of return, for example because investors expect a certain minimum yield. These inflexible targets may lead them to take on more risk than appropriate. It is clear that this could lead to trouble further down the road.