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What Is the Impact of a Low Interest Rate Environment on Bank Profitability?

Author

Listed:
  • Rich Podjasek
  • Hesna Genay

Abstract

The economic conditions and low interest rate environment of recent years have been challenging for banks that rely on a wide spread between long- and short-maturity yields to generate earnings. The authors? analysis indicates that a low interest rate environment is associated with decreased profitability for banks, particularly for small institutions. However, the estimated negative effects on bank profits are economically small and are outweighed by the likely positive effects on profits of low interest rates boosting economic activity.

Suggested Citation

  • Rich Podjasek & Hesna Genay, 2014. "What Is the Impact of a Low Interest Rate Environment on Bank Profitability?," Chicago Fed Letter, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhle:00009
    as

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monday assorted links
      by Tyler Cowen in Marginal Revolution on 2015-09-21 21:26:22

    Citations

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    Cited by:

    1. repec:eee:finlet:v:22:y:2017:i:c:p:153-157 is not listed on IDEAS
    2. Arteta, Carlos & Kose, Ayhan & Stocker, Marc & Taskin, Temel, 2016. "Negative Interest Rate Policies: Sources and Implications," CEPR Discussion Papers 11433, C.E.P.R. Discussion Papers.
    3. Stefan Kerbl & Michael Sigmund, 2016. "From low to negative rates: an asymmetric dilemma," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 32, pages 120-137.
    4. Buchholz, Manuel & Schmidt, Kirsten & Tonzer, Lena, 2017. "Do conventional monetary policy instruments matter in unconventional times?," IWH Discussion Papers 12/2017, Halle Institute for Economic Research (IWH).
    5. Groslambert, Bertrand & Chiappini, Raphaël & Bruno, Olivier, 2016. "Desperately seeking cash: Evidence from bank output measurement," Economic Modelling, Elsevier, vol. 59(C), pages 495-507.
    6. repec:eee:finlet:v:30:y:2019:i:c:p:233-239 is not listed on IDEAS
    7. Madaschi, Christophe & Pablos Nuevo, Irene, 2017. "The profitability of banks in a context of negative monetary policy rates: the cases of Sweden and Denmark," Occasional Paper Series 195, European Central Bank.
    8. repec:eee:jfinin:v:35:y:2018:i:pa:p:1-16 is not listed on IDEAS
    9. repec:eee:ecanpo:v:59:y:2018:i:c:p:40-53 is not listed on IDEAS
    10. repec:rba:rbaacv:acv2017-04 is not listed on IDEAS
    11. Borio, Claudio & Gambacorta, Leonardo, 2017. "Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 217-231.
    12. Haskamp, Ulrich, 2017. "Improving the forecasts of European regional banks' profitability with machine learning algorithms," Ruhr Economic Papers 705, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    13. repec:eee:jbfina:v:87:y:2018:i:c:p:164-186 is not listed on IDEAS
    14. Claessens, Stijn & Coleman, Nicholas & Donnelly, Michael, 2017. ""Low-For-Long� Interest Rates and Banks' Interest Margins and Profitability: Cross-Country Evidence," CEPR Discussion Papers 11842, C.E.P.R. Discussion Papers.
    15. repec:rfa:aefjnl:v:5:y:2018:i:6:p:111-125 is not listed on IDEAS
    16. repec:bla:intfin:v:20:y:2017:i:1:p:48-63 is not listed on IDEAS
    17. Óscar Arce & Miguel García-Posada & Sergio Mayordomo & Steven Ongena, 2018. "Adapting lending policies when negative interest rates hit banks’ profits," Working Papers 1832, Banco de España;Working Papers Homepage.
    18. Gardó, Sándor & Klaus, Benjamin, 2019. "Overcapacities in banking: measurements, trends and determinants," Occasional Paper Series 236, European Central Bank.
    19. Claudio Borio & Leonardo Gambacorta & Boris Hofmann, 2017. "The influence of monetary policy on bank profitability," International Finance, Wiley Blackwell, vol. 20(1), pages 48-63, March.
    20. Claudio Borio & Boris Hofmann, 2017. "Is Monetary Policy Less Effective When Interest Rates Are Persistently Low?," RBA Annual Conference Volume (Discontinued), in: Jonathan Hambur & John Simon (ed.), Monetary Policy and Financial Stability in a World of Low Interest Rates, Reserve Bank of Australia.
    21. Emilia Bonaccorsi di Patti & Francesco Palazzo, 2018. "Bank profitability and macroeconomic conditions: are business models different?," Questioni di Economia e Finanza (Occasional Papers) 436, Bank of Italy, Economic Research and International Relations Area.
    22. Jacob Bikker & Tobias Vervliet, 2017. "Bank profitability and risk-taking under low interest rates," DNB Working Papers 560, Netherlands Central Bank, Research Department.
    23. Philip Molyneux & Alessio Reghezza & Ru Xie, 2018. "Bank Profits and Margins in a World of Negative Rates," Working Papers 18001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    24. Claessens, Stijn & Coleman, Nicholas & Donnelly, Michael, 2018. "“Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 1-16.

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