TY - UNPB

T1 - Interest rate risk and monetary policy normalisation in the euro area

AU - Molyneux, Philip

AU - Pancotto, Livia

AU - Reghezza, Alessio

AU - Rodríguez d’Acri, Costanza

N1 - All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors.

PY - 2020/11/27

Y1 - 2020/11/27

N2 - 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.

AB - 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.

KW - Interest rate risk

KW - low interest rate environment

KW - balance-sheet determinants

KW - Unconventional Monetary Policies

M3 - Working paper

T3 - European Central Bank Working Paper Series

BT - Interest rate risk and monetary policy normalisation in the euro area

PB - European Central Bank

ER -