Real interest rates, bank borrowing, and fragility

Toni Ahnert, Kartik Anand and Philipp Johann König

No 2755, Working Paper Series from European Central Bank

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 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. JEL Classification: G01, G21, G28

Keywords: bank borrowing; fragility; funding liquidity risk channel; global games; real interest rates; rollover risk (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-ifn
Note: 848910
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Related works:
Working Paper: Real Interest Rates, Bank Borrowing, and Fragility (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222755

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