In a recently published discussion paper, we examined the impact of a prolonged period of low interest rates on German credit institutions’ interest business. Our analysis indicates that, if interest rates remain constant for the next four years, net interest income will fall by a total of 16 %2 - a huge cut given the key importance of interest business.
You might therefore be forgiven for thinking that nothing could be better for institutions right now than a rapid return to higher interest rates. And even though that’s probably right in the long term, rising interest rates create significant risks in the short and medium term. What happens if interest rates climb sharply within a short space of time?