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New study hopes to help understand the unintended effects of interest rate risk regulation, post financial crash

26 June 2018

The Department of Accounting and Finance will be leading a new research project in cooperation with the Deutsche Bundesbank to help clarify how interest rate risk regulation affects bank lending behaviour – which remains a big issue since the 2008 global financial crash.

More than 130,000 EUR has been made available to the research team led by Dr Klaus Schaeck, Professor of Banking and Finance, over the next two years by the prestigious Fritz Thyssen Foundation, the first large private individual foundation promoting science and research to be founded in the Federal Republic of Germany after the Second World War.

Why is this research important?

Interest rates have continued to be low in many advanced economies, and some central banks even moved below the ‘zero bound’, when central banks lowered short-term interest rates nearly zero or even moved them into negative territory – considered a trap because it leaves a central bank with very few options to stimulate the economy.

This practice means banks struggle to generate profits and regulators remain poised to renew their efforts to maintain financial stability and mitigate any shocks, so the study will also look at how the movement of policy rates below the zero bound affects bank performance in terms of profitability and risk-taking. It is an area interest rate regulation that has not yet been investigated.

“The proposed research is timely, policy-relevant, and it continues the successful collaboration we have been having with the Deutsche Bundesbank for many years. We already spent more than 9 months doing some preliminary work already, and our new work will help policy makers to better understand the effects of the new regulation, and bank lending behaviour,” said Dr Klaus Schaeck, who leads the research.

What the research will look at

To address these questions, researchers will look at data from the Deutsche Bundesbank which covers all German banks, and which have not been used before in this way. 

It is hoped that the findings of this work will be of help to reform systems beyond Germany - many other countries, including the US, Switzerland, Austria, Italy, and Japan have similarly structured banking systems. 

The research team includes three experts in the field of financial economics and empirical banking: Dr Klaus Schaeck, Professor of Banking in Finance, University of Bristol, Dr Thomas Kick, Head of the Stress Testing Section in the Deutsche Bundesbank's Banking Supervision Department and Huyen Nguyen, of the University of Nottingham.

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