Real Interest Rates, Bank Borrowing, and Fragility

44 Pages Posted: 8 Dec 2022

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR)

Kartik Anand

Deutsche Bundesbank

Philipp Koenig

Deutsche Bundesbank

Date Written: December 1, 2022

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.

Keywords: bank borrowing, fragility, funding liquidity risk channel, global games, real interest rates, rollover risk

JEL Classification: G01, G21, G28

Suggested Citation

Ahnert, Toni and Anand, Kartik and Koenig, Philipp, Real Interest Rates, Bank Borrowing, and Fragility (December 1, 2022). ECB Working Paper No. 2022/2755, Available at SSRN: https://ssrn.com/abstract=4296729 or http://dx.doi.org/10.2139/ssrn.4296729

Toni Ahnert (Contact Author)

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kartik Anand

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de/research_kartik_anand

Philipp Koenig

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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