Interest Rate Risk and Monetary Policy Normalisation in the Euro Area

42 Pages Posted: 1 Dec 2020

See all articles by Philip Molyneux

Philip Molyneux

University of Sharjah; University of Sharjah - College of Business Administration

Livia Pancotto

University of Strathclyde

Alessio Reghezza

Bangor Business School

Costanza Rodriguez d’Acri

European Central Bank (ECB)

Date Written: November, 2020


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

Suggested Citation

Molyneux, Philip and Molyneux, Philip and Pancotto, Livia and Reghezza, Alessio and d’Acri, Costanza Rodriguez, Interest Rate Risk and Monetary Policy Normalisation in the Euro Area (November, 2020). ECB Working Paper No. 20202496, Available at SSRN: or

Philip Molyneux

University of Sharjah ( email )

College of Business Administration
University of Sharjah
Sharjah, Sharjah
United Arab Emirates


University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

Livia Pancotto

University of Strathclyde ( email )

16 Richmond Street
Glasgow 1XQ, Scotland G1 1XQ
United Kingdom

Alessio Reghezza (Contact Author)

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Costanza Rodriguez D’Acri

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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