Real Interest Rates, Bank Borrowing, and Fragility

Toni Ahnert, Kartik Anand and Philipp Koenig

No 17793, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank's optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank creditors. Changes in the interest rate affect the price and amount of borrowing, both of which in influence bank fragility in opposite directions. Thus, the marginal impact of changes to the interest rate on bank fragility depends on the level of the interest rate. Finally, we derive testable implications that may guide future empirical work.

Keywords: Global games; Bank fragility; Rollover risk; Real interest rates; bank borrowing; funding liquidity risk channel (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2023-01
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Working Paper: Real interest rates, bank borrowing, and fragility (2022)
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