Impact of higher federal funds rates on bank risk during higher inflation in the U.S

Jascha-Alexander Koch and Mohammad Saiful Islam

Finance Research Letters, 2024, vol. 60, issue C

Abstract: Since March 2022, U.S. banks are facing rising federal funds rates. After eliminating banks’ reserve requirement in March 2020, higher funds rates became U.S. Federal Reserve System's key instrument to control inflation. However, it is unclear how banks’ risk is affected by rising Fed funds rates in absence of reserve requirements. Therefore, we examine the impact of higher Fed funds rates on banks’ risk indicators. Analyses reveal that higher Fed funds rates favorably impact credit risk – while adversely impacting regulatory capital risk, leverage risk, and insolvency risk. Moreover, the impact of higher Fed funds rates is heterogeneous across banks.

Keywords: Federal reserve funds rates; inflation; U.S. banks; credit risk; regulatory capital risk; leverage risk; insolvency risk (search for similar items in EconPapers)
JEL-codes: G1 G21 G28 M4 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012382

DOI: 10.1016/j.frl.2023.104866

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