Interest rate risk and monetary policy normalisation in the euro area
Philip Molyneux,
Livia Pancotto,
Alessio Reghezza (alessio.reghezza@ecb.europa.eu) and
Costanza Rodriguez d'Acri
Journal of International Money and Finance, 2022, vol. 124, issue C
Abstract:
A low interest rate environment is susceptible to sudden increases in policy rates and heightened interest rate risk (IRR). By using a sample of 81 euro area banks during the period 2014Q4-2018Q1 and a confidential supervisory measure of IRR, this paper identifies which bank-specific characteristics can amplify or weaken the impact of a 200 basis points positive shock in interest rates. We find that banks reliant on core deposits, that hold more floating-interest rate loans and that diversify their lending, either by sector or geography, are less exposed to a positive change in interest rates. Interestingly, we discover that banks that did not exploit the exceptional financing provided by the European Central Bank (ECB) reveal greater IRR exposure. These findings advance the debate on the impact of a possible return to a normalised monetary policy on the euro area banking sector.
Keywords: Interest Rate Risk; Low Interest Rate Environment; Balance-sheet Determinants; Unconventional Monetary Policies (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 F44 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)
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Working Paper: Interest rate risk and monetary policy normalisation in the euro area (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560622000274
DOI: 10.1016/j.jimonfin.2022.102624
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