Low Interest Rates and Bank’s Profitability – Update May 2019

Low Interest Rates and Bank’s Profitability – Update May 2019

My last post on this important topic was in 2017.  Since then several new articles and research papers have been published. I have compiled them in this post.  Please see references.

In my posts I have shown how many trends in economics for the last thirty years can be explained by unintendend consequences of US Federal Researve monetary policy of lowering interest rates to boost economic growth.

  • Rise of Shadow Banking – MMMF
  • Rise of International capital flows in USA
  • Growth of Consumer credit – Credit Cards and Housing Loans
  • Decline in Net Interest Margins of the Banks
  • Risk taking by banks to maintain and increase their profits
  • Rise of Non interest income of Banks
  • Rise of Non core business of banks
  • Rise of Mergers/Acquisitions/Consolidation in Banking sector

Related to these are:

  • Business Investments by Production side of economy
  • Increase in Market concentration of Products
  • Increase in Mergers and Acquisitions/consolidation among Product market businesses
  • Decreasing monitory policy effectiveness
  • Wrong economic growth forecasts
  • Secular Stagnation Hypothesis
  • Rise of Outsourcing and global value chains
  • Free Trade agreements
  • Increase in Ineqality of wealth and Income
  • Increase in corporate profits and equities market
  • Increase in corporate savings
  • Increase in share buybacks, and dividends payouts



and this one,

Increasing Market Concentration in USA: Update April 2019

Key Sources of Research:

Monetary policy and bank profitability in a low interest rate environment

Click to access ecb-wp2105.en.pdf

The “Reversal Interest Rate”: An Effective Lower Bound on Monetary Policy∗

Markus K. Brunnermeier and Yann Koby

This version: May 3, 2017

Click to access 16f_reversalrate.pdf

Click to access 26d_rir_bankofcanada.pdf

Interest Rate and Its Effect on Bank’s Profitability

Muhammad Faizan Malik1,2, Shehzad Khan1,2, Muhammad Ibrahim Khan1, Faisal Khan


Bank performance under negative interest rates



How low interest rates impact bank




Money and Banking


Monetary policy and bank equity values in a time of low interest rates

Miguel Ampudia, Skander Van den Heuvel


Click to access ecb.wp2199.en.pdf


Bank Profitability and Financial Stability

Prepared by TengTeng Xu, Kun Hu, and Udaibir S. Das1


January 2019




Financial stability implications of a prolonged period of low interest rates

Report submitted by a Working Group established by the Committee on the Global Financial System

The Group was co-chaired by Ulrich Bindseil (European Central Bank) and Steven B Kamin (Board of Governors of the Federal Reserve System)

July 2018


Click to access cgfs61.pdf


Monetary policy and bank profitability in a low interest rate environment

Carlo Altavilla Miguel Boucinha José-Luis Peydró
Economic Policy, Volume 33, Issue 96, October 2018, Pages 531–586,
Published: 09 October 2018





Determinants of bank profitability in emerging markets

by E. Kohlscheen, A. Murcia and J. Contreras

Monetary and Economic Department

January 2018


Click to access work686.pdf




The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area


Matthias Neuenkirch, Matthias Nöckel



Click to access cesifo1_wp6982.pdf






Óscar Arce, Miguel García-Posada, Sergio Mayordomo and Steven Ongena


Click to access dt1832e.pdf



Banks, Money and the Zero Lower Bound

Michael Kumhof

Xuan Wang

Click to access 2018-16.pdf




Banking in a Steady State of Low Growth and Interest Rates

by Qianying Chen, Mitsuru Katagiri, and Jay Surti






Changes in Monetary Policy and Banks’ Net Interest Margins: A Comparison across Four Tightening Episodes

Jared Berry, Felicia Ionescu, Robert Kurtzman, and Rebecca Zarutskie

Federal Reserve






Monetary Policy and Bank Profitability, 1870 – 2015

47 Pages Posted: 8 Feb 2019

Kaspar Zimmermann

University of Bonn

Date Written: January 25, 2019




The effect of falling interest rates and yield curve to banks’ interest margin and profitability: cross-country evidence from the EU banks in the aftermath of 2008 financial crisis

Giorgi Chagoshvili

MS Thesis







Bank Performance under Negative Interest Rates


by Jose A. Lopez, Andrew K. Rose, and Mark M. Spiegel


Click to access VOXNNIR.pdf

Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

  • Paula Cruz-García
  • Juan Fernández de GuevaraEmail author
  • Joaquín Maudos






Key Determinants of Net Interest Margin of Banks in the EU and the US

MS Thesis

Charles University

Bc. Petr Hanzlík




Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks’ Profitability : Update July 2017


Please see my previous posts.

Impact of Low Interest Rates on Bank’s Profitability

Low Interest Rates and Banks Profitability: Update – December 2016


Since December 2016, there are several new studies published which study low interest rates and Banks profitability.



Liberty State economics – a Blog of New York Federal Reserve has published a new column in June 2017.

Low Interest Rates and Bank Profits



Reduced Viability? Banks, Insurance Companies, and Low Interest Rates

CFA Institute


CFA Institute Blog: Low Interest Rates and Banks



Changes in Profitability for Primary Dealers since the Financial Crisis

Benjamin Allen

Skidmore College


Changes in Profitability for Primary Dealers since the Financial Crisis



Deloitte Consulting has published a new report in 2017 on Bank Models viability in environment of low interest rates.

Business model analysis European banking sector model in question


July 7, 2016
International banker





Low interest rates place a strain on the banks

bank of Finland





The profitability of EU banks: Hard work or a lost cause?


October 2016





The influence of monetary policy on bank profitability

Claudio Borio





Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia


Asian Development Bank





Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

Paula Cruz-García, Juan Fernández de Guevara and Joaquín Maudos





Dutch Central Bank has published a new study in November of 2016 on Banks’ Profitability and risk taking in a prolonged environment of Low Interest Rates.

Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks



Net interest margin in a low interest rate environment: Evidence for Slovenia

Net interest margin in a low interest rate environment: Evidence for Slovenia


Global Financial Stability Report, April 2017: Getting the Policy Mix Right



IMF Global Financial Stability Report April 2017



Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

Stefan Kerbl, Michael Sigmund

Bank of Finland

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment



Low Interest Rates and the Financial System

Remarks by Jerome H. Powell
Member Board of Governors of the Federal Reserve System
at the 77th Annual Meeting of the American Finance Association
Chicago, Illinois
January 7, 2017

Click to access powell20170107a.pdf



Bad zero: Financial Stability in a Low Interest Rate Environment

Elena Carletti  Giuseppe Ferrero

18 June 2017

Click to access paper%20Carletti_Ferrero_18June2017_tcm47-360758.pdf

Non Interest Income of Banks: Diversification and Consolidation

Why has Net interest income declined over the years? Particularly between 1980 – 2000

Why has Non Interest Income increased over the years? Particularly between 1980-2000


net interest income2


Mergers, Consolidation, Bank Failures, Diversification, Deregulation, Competition

Merger activity and overall consolidation are of particular interest in the U.S. banking industry. Since 1980, the structure of the U.S. banking industry has changed considerably, with over 10,000 mergers involving more than $7 trillion in acquired assets taking place. Furthermore, the number of institutions has declined dramatically over this period, and the concentration of assets held by the largest institutions has increased. There were 19,069 banks and thrifts operating in the U.S. in 1980 and 7,011 in 2010, a decline of over 60 percent. In 1980, the 10 largest banking organizations held only 13.5 percent of banking assets, increasing to 36 percent by 2000. By 2010, the 10 largest organizations held approximately 50 percent of banking assets. 

Changes in Regulation

The banking industry has undergone significant regulatory changes in the past 15 years. These regulatory changes have had significant effects on competition and structure, with some changes acting as the impetus for recent merger waves. For example, the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 allowed branch banking beyond one state and throughout the United States, and the Gramm–Leach–Bliley Act of 1999 (Financial Services Modernization Act) allowed banks to enter other financial markets and provide additional financial services. Both of these laws are potential causes for the increase in bank mergers. With such regulatory changes and the overall changes in the bank industry structure, banking has moved from a fragmented industry with banks operating only in individual states to a more unified industry, dominated by banks operating in large regions of the country.

Growth through Diversification (Product Mix):

From Banks’ Non-Interest Income and Systemic Risk:

However, prior the crisis, banks have increasingly earned a higher proportion of their profits from non-interest income compared to interest income. Non-interest income includes activities such as income from trading and securitization, investment banking and advisory fees, brokerage commissions, venture capital, and fiduciary income, and gains on non-hedging derivatives. These activities are different from the traditional deposit taking and lending functions of banks. In these activities banks are competing with other capital market intermediaries such as hedge funds, mutual funds, investment banks, insurance companies and private equity funds, all of whom do not have federal deposit insurance.

From Non interest Income and Financial Performance at U.S. Commercial Banks

Much of the empirical literature in commercial banking has followed these rich theoretical leads, analyzing the financial flows fundamental to the intermediation process (e.g., interest paid on deposits, interest received from loans and securities, and the resulting net interest margins) and the risks associated with those flows (e.g., liquidity risk associated with deposits, credit risk associated with loans, market risk associated with fixed income securities, and interest-rate risk associated with the relative maturities of deposits, loans, and securities). However, commercial bank business models have evolved over the past two decades, and today banks generate an increased portion of their income from non intermediation and/or non interest activities. For example, between 1980 and 2001 non interest income in the U.S. commercial banking system increased from 0.77% to 2.39% of aggregate banking industry assets, and increased from 20.31% to 42.20% of aggregate banking industry operating income.


From Non interest Income and Financial Performance at U.S. Commercial Banks

The across-the-board growth of non interest income at commercial banks suggests that intermediation activities are becoming a less important part of banking business strategies. The data displayed in Figure 1 suggest otherwise. If intermediation activities have become less important for banks over time, it stands to reason that the correlation between bank profitability and bank net interest margin would grow weaker over time. Figure 1, which displays the average correlation of ROE and net interest margin each year between 1984 and 2001, shows no such weakening. Although these data are crude and exhibit substantial noise over time, they suggest an intriguing possibility: increased noninterest income is co-existing with, rather than replacing, intermediation activities at the typical commercial bank.

Technological and Financial Innovation:

From Non interest Income and Financial Performance at U.S. Commercial Banks

Advances in information and communications technology (e.g., the Internet, ATMs), new intermediation technologies (e.g., loan securitizations, credit scoring), and the introduction and expansion of financial instruments and markets (high-yield bonds, commercial paper, financial derivatives) all would have occurred in the absence of deregulation. But deregulation allowed banks to achieve the scale to use these new technologies more efficiently, and the increased competition induced by deregulation provided banks with the incentives to adopt and adapt these new technologies. Many of these new technologies have emphasized noninterest income while de-emphasizing interest income at banks. Banks can extract fee income from customers willing to pay a “convenience premium” for doing their banking at ATMs or over the Internet. Banks can earn loan origination, loan securitization, and loan servicing fees to offset the interest income that they lost with the disintermediation of consumer lending (e.g., mortages, credit cards). Banks can earn fees from selling back-up lines of credit to firms that float commercial paper rather than borrowing from banks.

Large Banks seems to have larger proportion of their income from Non Interest Income.  Smaller banks still depend on deposits and intermediation for source of their income.



Key data and Research/Analysis sources:


a) Bank’s Non-Interest Income to Total Income for United States



b) Banks Prime loan Rate



c) Banks’ Non-Interest Income and Systemic Risk

Markus K. Brunnermeier,a Gang Dong,b and Darius Paliab





d) How do banks make money? The fallacies of fee income

Robert DeYoung and Tara Rice

Click to access ep_4qtr2004_part3_DeYoung_Rice.pdf


e) Non-interest income and total income stability


Rosie Smith Christos Staikouras and Geoffrey Wood

Click to access wp198.pdf


f) What Does the Financial Crisis Teach Us

about Different Banking Models?

Volume 4, Number 3, Spring 2010

Click to access What_Does_the_Financial.pdf


g) Diversification in Banking
Is Noninterest Income the Answer?

Kevin J. Stiroh∗
September 23, 2002

Click to access sr154.pdf


h) Non interest Income and Financial Performance at U.S. Commercial Banks

Robert DeYoung Tara Rice


Click to access sr-2003-2-pdf.pdf


I) Banks Non-Interest Income and Global Financial Stability

Robert F. Engle

Fariborz Moshirian

Sidharth Sahgal

Bohui Zhang




J) Non-Interest Income Activities and Bank Lending

Pejman Abedifar, Philip Molyneux†c, Amine Tarazi

Click to access S10_P1_PejmanAbedifar.pdf


K) How do banks make money? A variety of business strategies

Click to access ep-4qtr2004-part4-deyoung-rice-pdf.pdf


L) How bank business models drive interest margins: Evidence from U.S. bank-level data

Saskia E. van Ewijk , Ivo J.M. Arnold

August 2012

Click to access 2-Van-Ewijk-How-bank-business-models-drive-interest-margins_aug2012.pdf


M) Banking in the United States

Robert DeYoung University of Kansas




N) Nontraditional Banking Activities and Bank Failures During the Financial Crisis

Gokhan Torna

Robert DeYoung



O) The Decline of Traditional Banking: Implications for Financial Stability and Regulatory Policy

Franklin R. Edwards and Frederic S. Mishkin


Click to access 9507edwa.pdf


P) The trade-off between bank fees and net interest margins.

By Barry Williams and Gulasekaran Rajaguru


Q) The chicken or the egg? The trade-off between bank fee income and net interest margins

Barry Williams Bond University, Gulasekaran Rajaguru


R) The Darkside of Diversification: The Case of U.S. Financial Holding Companies
Kevin J. Stiroh and Adrienne Rumble
November 2003

Click to access The%20dark%20side%20of%20diversification.pdf


S) The consolidation of the financial services industry: Causes, consequences, and implications for the future

Allen N. Berger Rebecca S. Demsetz , Philip E. Strahan


T) The Outlook for the U.S. Banking Industry: What Does the Experience of the 1980s and 1990s Tell Us?

Kenneth Spong and Richard J. Sullivan


U) Do Large Banks have Lower Costs?
New Estimates of Returns to Scale for U.S. Banks

David C. Wheelock and
Paul W. Wilson

Click to access 2009-054.pdf


V) The Geographic Distribution and Characteristics of U.S. Bank Failures, 2007-2010: Do Bank Failures Still Reflect Local Economic Conditions?

Craig P. Aubuchon and David C. Wheelock

Click to access Aubuchon.pdf


W) Banking Industry Consolidation and Market Structure: Impact of the Financial Crisis and Recession

David C. Wheelock

Click to access 419-438Wheelock.pdf


X) Consolidation and Merger Activity in the United States Banking Industry from 2000 through 2010

Robert M. Adams 2012

Click to access 201251pap.pdf



Bank Mergers and Banking Structure in the United States, 1980-98
By Stephen A. Rhoades




Y) Bank Mergers and Industrywide Structure, 1980–94

Stephen A. Rhoades


Click to access ss169.pdf


Z) Bank Merger Activity in the United States, 1994–2003

Steven J. Pilloff

Click to access ss176.pdf



AA) Consolidation in the U.S. Banking Industry: Is the “Long, Strange Trip” About to End?


Kenneth D. Jones and Tim Critchfield


Click to access article2.pdf


AB) The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It’s Been

By: Allen N. Berger, Anil K. Kashyap and Joseph M. Scalise




AC) Consolidation in US Banking: Which Banks Engage in Mergers?

David C. Wheelock and
Paul W. Wilson

December 2002


Click to access 6608425.pdf


AD) Bank Consolidation: A Central Banker’s  Perspective

Fredric S. Mishkin


Click to access w5849.pdf


AE) The Transformation of the U.S. Financial Services Industry, 1975-2000: Competition, Consolidation and Increased Risks

Arthur E. Wilmarth Jr.,





Arthur E. Wilmarth, Jr.


Click to access wilmar.pdf


AG) How do changes in Market Interest rates affect Bank Profits?

Flannery, Mark J.

Business Review Sep (1980): 13-22.



AH) Bank profitability and the business cycle

by Ugo Albertazzi and Leonardo Gambacorta