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Interest Rate Risk and Cross-Sectional Effects of Micro-Prudential Regulation

Author

Listed:
  • Juliane Begenau
  • Vadim Elenev
  • Tim Landvoigt

Abstract

This paper investigates financial stability risks arising from banks' interest rate exposure and uninsured deposit funding. We develop a model of heterogeneous banks featuring endogenous run risk to jointly analyze portfolio and funding choices. The model replicates key empirical patterns, including the concentration of uninsured deposits in larger banks. We analyze the impact of monetary policy rate hikes and evaluate the capacity of microprudential tools to mitigate bank fragility. Results demonstrate that tightening capital requirements significantly lowers run risk. Higher liquidity requirements targeting uninsured deposits efficiently reduce run risk, provided they are met exclusively with reserves.

Suggested Citation

  • Juliane Begenau & Vadim Elenev & Tim Landvoigt, 2026. "Interest Rate Risk and Cross-Sectional Effects of Micro-Prudential Regulation," NBER Working Papers 34892, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34892
    Note: AP CF
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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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