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What explains low net interest income at community banks?

Author

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  • Charles S. Morris
  • Kristen Regehr

Abstract

Community bank performance has improved significantly since the financial crisis but is still below pre-crisis levels. One key concern is net interest income, which rose early in the recovery but now is near a 40-year low. Net interest income is important to the long-term viability of community banks because it is their core source of revenue. Given community banks' significance to local households and businesses, policymakers, bankers, and other stakeholders would like to know whether low net interest income is the \\"new normal\\" or if it will reverse when the economy improves. Morris and Regehr examine net interest income starting in the late 1970s. They find low net interest income can be largely explained by current economic and banking conditions, suggesting it will return to pre-recession levels as monetary policy normalizes and the economic recovery continues. They also find that compared to some more severe recessions in the past 40 years, net interest income is somewhat stronger given economic and banking conditions.

Suggested Citation

  • Charles S. Morris & Kristen Regehr, 2014. "What explains low net interest income at community banks?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 59-87.
  • Handle: RePEc:fip:fedker:00015
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    References listed on IDEAS

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    1. Landier, Augustin & Sraer, David & Thesmar, David, 2013. "Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy," IDEI Working Papers 800, Institut d'Économie Industrielle (IDEI), Toulouse.
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    3. John C. Driscoll & Ruth Judson, 2013. "Sticky deposit rates," Finance and Economics Discussion Series 2013-80, Board of Governors of the Federal Reserve System (U.S.).
    4. Nada Mora, 2014. "The weakened transmission of monetary policy to consumer loan rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 1-26.
    5. Vladimir Yankov, 2014. "In Search of a Risk-free Asset," Finance and Economics Discussion Series 2014-108, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Roisin McCord & Edward Simpson Prescott, 2014. "The Financial Crisis, the Collapse of Bank Entry, and Changes in the Size Distribution of Banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 23-50.

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