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The increase in the value of US banks' long-term assets as a result of low policy rates is moe than cancelled out by the damage done to bank profits due to squeezed interest rate margins once policy rate falls below a tipping point of 0.55%, according to a paper published as part of the ECB Research Bulletin.
Past the tipping point, which was reached in August 2007, further interest rate cuts may lead to banks becoming insolvent, with the potential for negative impacts on the health of the financial system. "In the region past the tipping point, the benefits of monetary easing should be more carefully weighed against the costs to financial stability," author Davide Porcellacchia concludes. However, "more work is required to obtain a sound quantification of the tipping point, also for the euro area."