Journal of money credit and banking· 2026Q1
The Tipping Point: Interest Rates and Financial Stability
- 2citations
- Q1SCImago
- 2026year
Short summary
A specific interest rate level can destabilize banks by causing the value of their long-term assets to fall faster than their margins widen, a phenomenon captured by a 'negative effective maturity mismatch'.
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Key points
- Interest rates have dual effects on banks: decreasing long-term asset value and widening interest margins.
- A 'negative effective maturity mismatch', adjusted for deposit duration, determines which effect dominates.
- A specific interest rate level can cause banks to become unstable, acting as a tipping point.
- This tipping point may represent a lower bound for interest rates to maintain financial stability.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract This paper studies the impact of interest rates on bank stability in a standard bank‐run model. Banks invest in long‐term assets, whose value decreases with interest rates, and set deposit rates to optimally insure depositors' liquidity risk. Liquidity‐risk insurance implies banks earn interest margins, which increase with interest rates. Hence, interest rates have two countervailing effects: they reduce the value of banks' long‐term assets while widening their margins. First, the paper characterizes the parametric condition under which an effect dominates. The condition implies interest‐rate risk is captured by banks' maturity mismatch adjusted for deposits' effective duration. Second, the paper solves for the interest‐rate level that tips banks into instability. Quantification points to the possibility of a negative effective maturity mismatch, making the tipping point a lower bound on interest rates.
The authors' abstract, as published at the source. Journal of money credit and banking, 2026 · DOI ↗
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Field: Finance
FinanceEconomics, Econometrics and Finance