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Interest rate risk and monetary policy normalisation in the euro area

Alessio Reghezza, Rodriguez d’Acri, Costanza, Livia Pancotto and Philip Molyneux

No 2496, Working Paper Series from European Central Bank

Abstract: In the current low interest rate environment in the euro area there is potential for a sudden increase in interest 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 on euro area banking of a possible return to a normalised monetary policy. JEL Classification: E43, E44, E52, G21, F44

Keywords: balance-sheet determinants; interest rate risk; low interest rate environment; unconventional monetary policies (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202496

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