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Do Net Interest Margins for Small and Large Banks Vary Differently with Interest Rates?

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  • Rajdeep Sengupta
  • Fei Xue

Abstract

Rajdeep Sengupta and Fei Xue examine the relative contributions of activities that compose bank NIMs as well as their sensitivities to interest rates. They find that the recent decline in bank NIMs was largely driven by changes in interest rates rather than changes in the composition of NIM components in bank portfolios. After controlling for financial and economic conditions that also affect bank NIMs, they find that NIM contributions from loans and deposits are highly sensitive to interest rates. However, these sensitivities are not always symmetric between large and small banks and between increases and decreases in interest rates. Although lowering interest rates may be relatively disadvantageous for small banks by lowering NIMs, raising interest rates is not necessarily advantageous for them.

Suggested Citation

  • Rajdeep Sengupta & Fei Xue, 2022. "Do Net Interest Margins for Small and Large Banks Vary Differently with Interest Rates?," Economic Review, Federal Reserve Bank of Kansas City, vol. 107(no.1), February.
    • Handle: RePEc:fip:fedker:93700
    DOI: 10.18651/ER/v107n1SenguptaXue
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    References listed on IDEAS

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    1. Huberto M. Ennis & Arantxa Jarque, 2021. "Bank Lending in the Time of COVID," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, vol. 21(05), February.
    2. 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.
    3. Joseph G. Haubrich & Tristan Young, 2019. "Trends in the Noninterest Income of Banks," Economic Commentary, Federal Reserve Bank of Cleveland, issue September.
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    Cited by:

    1. Brendan Laliberte & Rajdeep Sengupta, 2024. "Why Do Net Interest Margins Behave Differently across Banks as Interest Rates Rise?," Economic Review, Federal Reserve Bank of Kansas City, vol. 0(no.1), pages 1-24, March.
    2. Stefan Jacewitz, 2022. "The Increasing Brick-and-Mortar Efficiency of Community Banks," Economic Review, Federal Reserve Bank of Kansas City, vol. 107(no.2), May.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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