Monetary policy and banking stability

Abstract

What are the effects of monetary policy rates for banking stability? For example, when inflation started rising in 2022, central banks raised monetary policy rates substantially, with a more than 400 basis points increase in the United States and in the euro area. As of April 2026, monetary rates in the United States are still high and significantly higher than before 2022. This monetary policy action of raising interest rates implies crucial trade-offs, not only between monetary tightening and the risk of an economic recession, which has been extensively analyzed in policy circles and in academic studies, but also between tighter monetary policy conditions and the risk of financial instability, in particular, the risk of a banking crisis.