A recent line of research highlights trust as an important element guiding the decision of households to invest into risky financial assets and insurance products. This paper contributes to this literature by identifying happiness as another key driver of the same decision. Using detailed survey data from a sample of Dutch households, we show that the impact of happiness on households’ financial decisions works in the opposite direction and is more economically important compared to trust. Specifically, happiness leads to a lower probability of investing into risky financial assets and having insurance, while trust has the usual positive effect found in the literature. Furthermore, the negative effect of happiness on the ownership of risky financial assets is about 6% higher compared to the positive equivalent of trust. Similarly, the negative effect of happiness on the ownership of insurance is 3% higher than the positive effect of trust.

Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical for the average bank, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk.