Consumer prices are rising in many countries worldwide. Interest rates may increase if this trend continues. Critically discuss how the current macroeconomic environment may lead to a rise in interest rates, the potential implications for the balance sheet of banks and for the entire banking system.  

Preparation Notes:  

– Interest rate risk and monetary policy normalisation in the euro area.  

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2496~42f83d43aa.en.pdf 

or the published version here:  

https://www.sciencedirect.com/science/article/abs/pii/S0261560622000274 

– The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area  https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op272~dd8168a8cc.en.pdf 

– Relevant documents can be found on the Bank for International Settlement website. ( https://www.bis.org)  

– Additional references for interest rate risk:  

Cornett M., and Saunders A., (2018). Financial institutions management: a risk management approach. McGraw-Hill Education  

Sironi, A., and Resti, A. (2007). Risk management and shareholders' value in banking: from risk measurement models to capital allocation policies (Vol. 417). John Wiley & Sons

Note:  Not more than 2000 words