In such a scenario, assets, including real estate, may be repriced rather quickly. Borrowers with short-term liabilities may suddenly have to pay more for their debt. Bank profits may be squeezed in the short term, depending on banks’ reliance on interest income.
Financial institutions would be affected quite differently: German savings and cooperative banks, which account for 58% of lending to households and 41% of lending to corporates, do little in the way of hedging.4 Larger banks, by contrast, often use derivatives to limit their exposure to interest rate risk. Hedging, however, does not reduce the risk within the system.