Low Interest Rates and Banks’ Profitability – Update October 2020
My last post on this topic was in May 2019.
Research continues on this important topic. What are the effects of Monetary policy on Financial Institution?
Please see my previous posts to find the issues. In this post I have compiled papers and articles published since my last post in 2019.
Rational Decision making by the firms
- Lend More – When margins decline, the volumes must go up to maintain or increase profits. This increases risk taking.
- Diversify – Look for other sources of earnings
- Consolidate – Merge with other banks as a business strategy to grow loan volumes.
How do banks make money? What is source of their income? How much is Net interest income? How much is Non Interest Income?
As you can see from the graphs below, Net interest income of banks is going up. Although the net interest margins are down, Banks are earning their income mostly from net interest income.
Volumes of Outstanding loans must be going up to make up for decrease in margins.
Sources of interest income can be
- Commercial loans
- Real Estate loans
- Auto Loans
- Credit cards
- Student Loans
Additionally consolidation among the banks can be partially explained by the decling number of banks. See graph below.
Diversification to find other sources of earnings.
Image Source: FRED
EFFECTIVE FEDERAL FUNDS RATE (FEDFUNDS)
Image Source: FRED
NET INTEREST MARGIN FOR ALL U.S. BANKS (USNIM)
Image Source: Statista
AVERAGE NET INTEREST MARGIN OF BANKS IN THE UNITED STATES FROM 1995 TO 2019
Image Source: Liberty Street Economics 2017
Image Source: FRED
BANK’S NON-INTEREST INCOME TO TOTAL INCOME FOR UNITED STATES
Image Source: FRED
Net Interest Income for Commercial Banks in United States
Image Source: FRED
Bank Credit, All Commercial Banks (TOTBKCR)
Image Source: FRED
Loans and Leases in Bank Credit, All Commercial Banks (TOTLL)
Image Source: FRED
Commercial and Industrial Loans, All Commercial Banks (BUSLOANS)
Image Source: FRED
REAL ESTATE LOANS, ALL COMMERCIAL BANKS (REALLN)
Image Source: FRED
Consumer Loans, All Commercial Banks (CONSUMER)
Image Source: FRED
COMMERCIAL BANKS IN THE U.S. (USNUM)
Key Terms
- Net Interest Margin
- Profitability
- Interest Income
- Non Interest Income
- Monetary Policy
- Fed Funds Rate
- 10 Year T Bond’s Rate
- Shadow Banking
- Search for Yield
- Risk Taking
- Housing Loans
- Auto Loan
- Deposits
- Credit Cards
- Money Markets Mutual Funds
- Money Markets
- Capital Markets
- International Capital Flows
- Diversification
- Mergers
- To Big to Fail
- Non Core Business
My Related Posts
Low Interest Rates and Bank’s Profitability – Update May 2019
Low Interest Rates and Banks’ Profitability : Update July 2017
Low Interest Rates and Banks Profitability: Update – December 2016
Impact of Low Interest Rates on Bank’s Profitability
Non Interest Income of Banks: Diversification and Consolidation
Low Interest Rates and Risk taking channel of Monetary Policy
Low Interest Rates and International Investment Position of USA
Low Interest Rates and International Capital Flows
Key Sources of Research
Bank profitability and risk‐taking under low interest rates
Jacob A. Bikker1,2 | Tobias M. Vervliet3
How banks can ease the pain of negative interest rates
March 3, 2020 | Article
Bank intermediation when interest rates are very low for long
Michael Brei, Claudio Borio, Leonardo Gambacorta
07 February 2020
https://voxeu.org/article/bank-intermediation-when-interest-rates-are-very-low-long
Implications of negative interest rates for the net interest margin and lending of euro area banks
by Melanie Klein
Monetary and Economic Department
March 2020
Are Banks Exposed to Interest Rate Risk?
Pascal Paul and Simon W. Zhu
2020-16 | June 22, 2020 | Research from Federal Reserve Bank of San Francisco
Negative rates and the transmission of monetary policy
Prepared by Miguel Boucinha and Lorenzo Burlon[1]
Published as part of the ECB Economic Bulletin, Issue 3/2020.
Is there a zero lower bound?
The effects of negative policy rates on banks and firms
Revised June 2020
The impact of very low interest rates on bank profitability
Bank intermediation activity in a low interest rate environment
by Michael Brei, Claudio Borio and Leonardo Gambacorta
Monetary and Economic Department August 2019
Do Negative Interest Rates Explain Low Profitability of European Banks?1
Nicholas Coleman* and Viktors Stebunovs*
Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates1
Miguel Ampudia2 and Skander J. Van den Heuvel3 May 2019
Negative Interest Rates, Bank Profitability and Risk-taking
- January 2019
- SSRN Electronic Journal
Monetary Policy and Bank Profitability in a Low Interest Rate Environment: A Follow-up and a Rejoinder
By Charles Goodhart and Ali Kabiri
Monetary Policy and Bank Profitability in a Low Interest Rate Environment
Carlo Altavilla, Miguel Boucinha and José-Luis Peydró
Barcelona GSE Working Paper: 1101 | May 2019
Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates
Mauricio Ulate Campos Federal Reserve Bank of San Francisco
September 2019
NEGATIVE NOMINAL INTEREST RATES AND THE BANK LENDING CHANNEL
Gauti B. Eggertsson Ragnar E. Juelsrud Lawrence H. Summers Ella Getz Wold
Working Paper 25416
Implications of negative interest rates for the net interest margin and lending of euro area banks
Melanie Klein
Negative Nominal Interest Rates: A Primer
https://www.moneyandbanking.com/commentary/2019/11/30/negative-nominal-interest-rates-a-primer
Trends in the Noninterest Income of Banks
Joseph G. Haubrich and Tristan Young
Negative interest rates in the euro area: does it hurt banks?
Interest rate pass-through in the low interest rate environment
Average net interest margin of banks in the United States from 1995 to 2019
https://www.statista.com/statistics/210869/net-interest-margin-for-all-us-banks/
Effective Federal Funds Rate (FEDFUNDS)
https://fred.stlouisfed.org/series/FEDFUNDS
https://www.newyorkfed.org/markets/obfrinfo
How low interest rates can hurt competition, and the economy
They help big companies more than small ones, depressing investment and productivity
Monetary Policy Report
June 12, 2020
Federal Reserve
The Long Decline of Global Interest Rates
Posted On : Published By : BER staff
GLOBAL FINANCIAL STABILITY REPORT:
Markets in the Time of COVID-19
Chapter 4
April 2020
IMF
Low Interest Rates and Bank Profits
Katherine Di Lucido, Anna Kovner, and Samantha Zeller
Liberty Street Economics
2017
https://libertystreeteconomics.newyorkfed.org/2017/06/low-interest-rates-and-bank-profits.html
Bank’s Non-Interest Income to Total Income for United States (DDEI03USA156NWDB)
https://fred.stlouisfed.org/series/DDEI03USA156NWDB
Net Interest Income for Commercial Banks in United States
Net Interest Margin for all U.S. Banks (USNIM)
https://fred.stlouisfed.org/series/USNIM
Commercial Banks in the U.S. (USNUM)
https://fred.stlouisfed.org/series/USNUM
Loans and Leases in Bank Credit, All Commercial Banks (TOTLL)
https://fred.stlouisfed.org/series/TOTLL
Bank Credit, All Commercial Banks (TOTBKCR)
https://fred.stlouisfed.org/series/TOTBKCR
Commercial and Industrial Loans, All Commercial Banks (BUSLOANS)
https://fred.stlouisfed.org/series/BUSLOANS
Consumer Credit
https://fred.stlouisfed.org/categories/101
Real Estate Loans, All Commercial Banks (REALLN)
https://fred.stlouisfed.org/series/REALLN