Interest Rate Risk and Cross-Sectional Effects of Micro-Prudential Regulation

This paper investigates financial stability risks arising from banks' interest rate exposure and uninsured deposit funding. We develop a model of heterogeneous banks featuring endogenous run risk to jointly analyze portfolio and funding choices. The model replicates key empirical patterns, including the concentration of uninsured deposits in larger banks. We analyze the impact of monetary policy rate hikes and evaluate the capacity of microprudential tools to mitigate bank fragility. Results demonstrate that tightening capital requirements significantly lowers run risk. Higher liquidity requirements targeting uninsured deposits efficiently reduce run risk, provided they are met exclusively with reserves.