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?
Persistently low interest rates have driven up what is known as maturity transformation business at German banks and savings banks. The narrow spread between short and long-term interest rates means that institutions are now seeing stronger inflows of short-term deposits. If, at the same time, they originate more long-term, fixed-interest loans, they increase their exposure to the liquidity and rate interest risk accordingly.