Impact of Higher Federal Funds Rates on Bank Risk During Higher Inflation in the U.S

15 Pages Posted: 16 Nov 2023

See all articles by Jascha-Alexander Koch

Jascha-Alexander Koch

University Siegen - School of Economic Disciplines; University of Siegen

Mohammad Saiful Islam

University of Siegen

Abstract

Since March 2022, U.S. banks are facing rising federal funds rates. After eliminating banks’ reserve requirement in March 2020, higher funds rates became U.S. Federal Reserve System’s key instrument to control inflation. However, it is unclear how banks’ risk is affected by rising Fed funds rates in absence of reserve requirements. Therefore, we examine the impact of higher Fed funds rates on banks’ risk indicators. Analyses reveal that higher Fed funds rates positively impact credit risk – while negatively impacting regulatory capital risk, leverage risk, and insolvency risk. Moreover, the impact of higher Fed funds rates is heterogeneous across banks.

Keywords: Federal Reserve funds rates, Inflation, U.S. banks, credit risk, regulatory capital risk, leverage risk, insolvency risk

Suggested Citation

Koch, Jascha-Alexander and Islam, Mohammad Saiful, Impact of Higher Federal Funds Rates on Bank Risk During Higher Inflation in the U.S. Available at SSRN: https://ssrn.com/abstract=4634693 or http://dx.doi.org/10.2139/ssrn.4634693

Jascha-Alexander Koch (Contact Author)

University Siegen - School of Economic Disciplines ( email )

Unteres Schloss
Post Box 29
Siegen, 57072
Germany

University of Siegen ( email )

Hoelderlinstrasse 3
57068 Siegen, NRW 57068
Germany

Mohammad Saiful Islam

University of Siegen ( email )

Hoelderlinstrasse 3
57068 Siegen, 57068
Germany

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