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Tail Sensitivity of US Bank Net Interest Margins: A Bayesian Penalized Quantile Regression Approach

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  • Nicholas Fritsch

Abstract

Bank net interest margins (NIM) have been historically stable in the US on average, but this stability deteriorated in the post-2020 period, particularly in the tails of the distribution. Recent literature disagrees on the extent to which banks hedge interest rate risk, and past literature shows that credit risk and persistence are also important considerations for bank NIM. I use a novel approach to Bayesian dynamic panel quantile regression to document heterogeneity in US bank NIM estimated sensitivities to interest rates, credit risk, and own persistence. I find increased sensitivity to interest rates in the tails of the conditional NIM distribution during the post-2020 period, driven by increased interest rate sensitivities of bank loans and deposits. Density forecast evaluation shows that the model forecasts outperform frequentist benchmark models, and standard tail risk measures show that risks to bank NIM have material implications for bottom-line measures of bank profitability.

Suggested Citation

  • Nicholas Fritsch, 2025. "Tail Sensitivity of US Bank Net Interest Margins: A Bayesian Penalized Quantile Regression Approach," Working Papers 25-09, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:99663
    DOI: 10.26509/frbc-wp-202509
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    More about this item

    Keywords

    net interest margins; interest rate risk; Bayesian quantile regression; dynamic panel; density forecasting;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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