ECB paper examines effects of real rates on banks’ fragility
Level of real interest rates determines whether price or scale effects predominates, researchers find
A working paper published by the European Central Bank presents a model of how real interest rates affect the stability of banks.
In Real interest rates, bank borrowing and fragility, Toni Ahnert, Kartik Anand and Philipp Johann König extend the standard model of a bank subject to rollover risk. Their model makes both borrowing volume and the price of debt endogenous.
They say this allows them to split the effect of interest rate increases on the bank’s fragility “into distinct and opposing
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