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Real Interest Rates, Bank Borrowing, and Fragility

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  • TONI AHNERT
  • KARTIK ANAND
  • PHILIPP JOHANN KÖNIG

Abstract

How do real interest rates affect financial fragility? We study this issue in a model where 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 creditors. Changes in the interest rate affect the price and amount of borrowing, 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.

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  • Toni Ahnert & Kartik Anand & Philipp Johann König, 2024. "Real Interest Rates, Bank Borrowing, and Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(6), pages 1545-1571, September.
    • Handle: RePEc:wly:jmoncb:v:56:y:2024:i:6:p:1545-1571
    DOI: 10.1111/jmcb.13033
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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