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The effect of the Fed zero-lower bound announcement on bank profitability and diversification

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  • Andrea Landi
  • Alex Sclip
  • Valeria Venturelli

Abstract

In this paper, we investigate the impact of the Federal Reserve's decision to maintain the zero-lower bound for at least two years on bank profitability and strategies. Using a difference in difference setting, we find that banks with lower reliance on deposit funding are more sensitive to the policy event. Our evidence suggests that, compared to high deposit banks, the reduction in net worth of low deposit banks, induced them to change their strategies toward an increase in fee income to maintain the targeted level of performance. This increase is mainly explained by fiduciary and insurance-related revenues that entail a lower threat for financial stability.

Suggested Citation

  • Andrea Landi & Alex Sclip & Valeria Venturelli, 2020. "The effect of the Fed zero-lower bound announcement on bank profitability and diversification," The European Journal of Finance, Taylor & Francis Journals, vol. 26(16), pages 1646-1672, November.
    • Handle: RePEc:taf:eurjfi:v:26:y:2020:i:16:p:1646-1672
    DOI: 10.1080/1351847X.2020.1782961
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    Cited by:

    1. Salvatore Perdichizzi & Matteo Cotugno & Giuseppe Torluccio, 2022. "Is the ECB’s conventional monetary policy state‐dependent? An event study approach," Manchester School, University of Manchester, vol. 90(2), pages 213-236, March.

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