Financial stability analysis of large changes in interest rates - Call for papers

The Analysis Working Group (AWG) of the European Systemic Risk Board (ESRB) and the Macroprudential Analysis Group (MPAG) of the European Central Bank (ECB) will hold their annual workshop in Riga on 1 July 2024, jointly hosted by Latvijas Banka.

Background

Sharp fluctuations in interest rates can pose challenges to financial stability. During a prolonged period of low interest rates and abundant liquidity, vulnerabilities can build up, while a steep increase in interest rates can cause systemic risks to materialise. These risks may manifest themselves through macro-economic channels, changes in asset prices, the functioning of financial markets, the availability of liquidity within the financial system, and the repayment capacity of private and public debtors. As a result, higher interest rates may also significantly affect the profitability and balance sheets of financial intermediaries. In the short term net interest income tends to benefit, but in the longer term this effect is counterbalanced by higher funding costs and the potential emergence of credit risk and interest rate risk.

This workshop will provide a forum for discussing methodologies and tools to analyse how large changes in interest rates can lead to risks for financial stability. It will focus on the transmission channels of such changes to the macro-financial environment of relevance for financial stability, the impact of interest rate shocks on banks, and the effects on non-bank financial intermediation.

Objectives

The workshop will offer an opportunity to share and review empirical studies, analytical models and methodological tools in the field of macroprudential analysis to support financial stability assessments from a system-wide perspective both within jurisdictions and in the euro area.

We welcome any theoretical and empirical contributions on the following topics:

Transmission channels of large changes in interest rates

Systemic risks typically build up in periods of low interest rates resulting inter alia from excessive credit growth and a search for yield. The higher indebtedness and elevated asset prices that ensue can create risks for financial stability in the subsequent phase when financial conditions become tighter.

Fluctuations in interest rates have become more pronounced in recent years. Moreover, the normalisation of central banks’ balance sheets across the world will affect liquidity in the financial system. International institutions and jurisdictions use various models and techniques to measure the financial cycle and the build-up of financial stability risks. The workshop could provide more insights into how interest rate developments might affect systemic risk across financial and economic cycles.

Impact of interest rate shocks on banks

Changes in interest rates affect the financial position of banks. The extent of the impact depends on many factors, including the quality and composition of the banks’ lending activities, the share of fixed versus variable rate lending, their funding structure and the size of their securities portfolios, accounting classification method, and hedging activities.

The workshop will be a forum for discussing the resilience of banks to risks related to interest rate changes and how banks manage these risks. This would help participants to gain further insights into various factors that influence banks’ credit risk and interest rate risk. From a macroprudential perspective, we would welcome any submissions offering further analytical and empirical insights into the main factors that support credit supply in an environment of interest rate fluctuations.

The digitalisation of financial services and use of social media are topics of interest that have had a major effect on the stability of some non-euro area banking sectors. Abrupt changes in the pricing of funding and liquidity influence both risks of stress in the banking system and the speed at which vulnerabilities materialise and spread between banks and to other jurisdictions.

Effects on non-bank financial intermediation

Changes in interest rates affect the financial system through direct and indirect interlinkages. From a financial stability perspective, the main question is which part of the financial system ultimately bears the interest rate risks and how these risks are absorbed.

To address this question, it is important to identify the key nodes of vulnerabilities and the main transmission channels that can cause contagion effects. For example, there may be features in the financial system, such as margin calls made by investment funds, that can trigger an unintended propagation of interest rate shocks. It would be particularly interesting to receive submissions that look in depth at the interconnectedness between banks and non-banks and how this interaction can affect system-wide risks when there are large changes in interest rates.

The organisers welcome submissions from academics, authors working for members of the European System of Central Banks, the Single Supervisory Mechanism, or the European Systemic Risk Board, as well as members of other organisations or international financial institutions with a professional interest in the issues outlined above.

Interested authors should send either completed draft papers (strongly preferred) or extended abstracts to euriskworkshop@ecb.europa.eu by Friday, 3 May 2024, with the subject “AWG/MPAG workshop submission”. All submissions should be in English (in PDF format) and should include an abstract, as well as the name and email address of a nominated author who could present the paper.

Selection process 

The organising committee will review all submissions received by the deadline, looking at their quality, their analytical relevance, and the level of interest that they are likely to generate. The committee will also take into account the overall balance of the workshop, in terms of subject matter and approaches. All authors will be notified by Friday, 24 May 2024, as to whether their papers have been accepted.

Expenses

The travel and accommodation expenses of all attendees, presenters and discussants representing members of the ESCB, ESRB, EU organisations and international financial institutions should be covered by their own organisations. No participation fees will be charged.

Organising committee

• Paul Hiebert, MPAG Co-Chair
• Katja Taipalus, MPAG Co-Chair
• Tuomas Peltonen, ESRB
• Olga Lielkalne, Latvijas Banka
• Kristīne Petrovska, Latvijas Banka
• Marco van Hengel, MPAG Secretary
• Jonathan Rice, AWG Secretary

Coordination

• Anne McTaggart, ECB
• Shirley Simmons-Nocca, ESRB