The tipping point: interest rates and financial stability

Davide Porcellacchia

No 2447, Working Paper Series from European Central Bank

Abstract: This paper studies how interest rates impact bank stability in a standard banking model. There are two opposite effects. While higher rates widen banks’ interest margins, they also reduce the value of their long-term assets. First, the paper characterizes conditions under which an effect dominates. Second, it shows that banking crises are triggered by interest rates crossing a tipping point. Quantitatively, I find that the effect on interest margins is dominant. Hence, low rates are the threat to bank stability. Moreover, I estimate the tipping point at 0.32% for the US economy in the decade before the Global Financial Crisis. JEL Classification: E43, E50, G21

Keywords: deposit franchise; effective lower bound; financial crisis; maturity mismatch (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
Note: 3169100
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202447

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