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Real Interest Rates, Bank Borrowing, and Fragility

Author

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  • Ahnert, Toni
  • Anand, Kartik
  • Koenig, Philipp

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 in 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.

Suggested Citation

  • Ahnert, Toni & Anand, Kartik & Koenig, Philipp, 2023. "Real Interest Rates, Bank Borrowing, and Fragility," CEPR Discussion Papers 17793, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17793
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    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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