Low rates and bank stability: the risk of a tipping point

Davide Porcellacchia

Research Bulletin, 2021, vol. 88

Abstract: Policy rates in advanced economies are unusually low. What effect does this have on bank stability? I identify two competing effects. On the one hand, low rates harm bank profits by squeezing interest margins. On the other hand, they boost the value of long-term assets held by banks. Using a standard banking model, I determine the policy rate level at which these two forces cancel each other out, i.e. the tipping point. Past this tipping point, the net effect of low rates on bank capital is negative. Applying the model to the US economy, I quantify the tipping point in August 2007 as a policy rate of 0.55%. JEL Classification: E43, E50, G21

Keywords: Deposit franchise; financial stability; low rates (search for similar items in EconPapers)
Date: 2021-10
Note: 3169100
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Citations: View citations in EconPapers (1)

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