Interest rate risk in the banking book and financial instability: Europe versus the US

Interest rate risk in the banking book and financial instability: Europe versus the US

Fecha: julio 2023

Marta Alberni, Ángel Berges and María Rodríguez

Rate sensitivity

SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 4 (July 2023)

Although the new interest rate scenario is clearly good news for the banks’ margins, the intensity, speed and persistence with which the increases have affected all tenors of the curve have other potentially very adverse effects for the banks more exposed to interest rate risk, as evidenced in the recent crises affecting several American banks and, here in Europe, Credit Suisse. In order to prevent contagion with implications for financial stability, it is vital to correctly measure latent interest rate and liquidity risk on both the asset (looking beyond conventional portfolio classification for accounting purposes) and liability sides of the banking business in terms of financial stability and sensitivity. It is against that backdrop that we raise and address two questions. The first relates to the sufficiency of the current regulatory and supervisory framework governing these two principal risks, having failed to prevent or sufficiently foresee the excessive build-up of both risks at the banks in question. The second has to do with risks to financial stability, to which end we analyse the European and US banking sectors to conclude that while EU banks on the whole appear to be less exposed to interest rate and liquidity risk, these aggregate parameters mask significant dispersion among the various entities on both sides of the Atlantic.

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