These developments trigger several questions: First, what are the channels through which a low interest rate environment can affect the financial system’s exposure to risk? Second, how sensitive are the balance sheets of euro area financial institutions to duration risk? Third, how should regulatory and macroprudential policies be designed to avoid the negative implication of rising interest rates?
First, while there is variance within the euro area, on the whole there is a relatively higher proportion of micro and small firms in Europe than in the US. European firms are also more static, in the sense that they do not grow or shrink over time.