{"title":"Macro-banking stability, sovereign debt and the inflation channel","authors":"Qingqing Cao , Raoul Minetti , Nicholas Rowe","doi":"10.1016/j.frl.2025.107144","DOIUrl":null,"url":null,"abstract":"<div><div>We investigate the impact of inflation on banking stability. Using granular U.S. data from 1997 to 2014, we show that higher inflation induces a significant deterioration of banks’ capital position because of the maturity mismatch of banks’ assets and liabilities. Quantitative analysis reveals that the elasticity of banking capital to long-term inflation expectations is high, as a 1% increase to long-term inflation expectations leads to a 15% decrease in banks’ Tier 1 capital. The analysis suggests that the use of inflation to reduce sovereigns’ real debt burden could aggravate the sovereign-bank loop during debt crises.</div></div>","PeriodicalId":12167,"journal":{"name":"Finance Research Letters","volume":"78 ","pages":"Article 107144"},"PeriodicalIF":7.4000,"publicationDate":"2025-03-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Finance Research Letters","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1544612325004076","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We investigate the impact of inflation on banking stability. Using granular U.S. data from 1997 to 2014, we show that higher inflation induces a significant deterioration of banks’ capital position because of the maturity mismatch of banks’ assets and liabilities. Quantitative analysis reveals that the elasticity of banking capital to long-term inflation expectations is high, as a 1% increase to long-term inflation expectations leads to a 15% decrease in banks’ Tier 1 capital. The analysis suggests that the use of inflation to reduce sovereigns’ real debt burden could aggravate the sovereign-bank loop during debt crises.
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